In her column, "It's Time for Money Funds to Fess Up About Fluctuating Values," Barbara Rehm seems too intent on promoting regulations "that could make money funds miserable," regardless of their impact on investors, the financial system, and the economy.
If regulators follow her lead, the losers will not be funds, but the 56 million individuals and millions of businesses, state and local governments, nonprofits, retirement plans, and other investors who rely upon these funds and their 40-year track record of success.
There is indeed a "fiction" at play in the debate over money market funds. The fiction is the notion that forcing money market funds to abandon their stable $1-per-share value and "float" will make the financial system safer. In fact, floating these funds' value won’t affect investors' expectations; won't modify their behavior in the next financial crisis; and won't make the financial system any more secure. Instead, forcing money market funds to float their value will impose such onerous legal, accounting, and tax-reporting burdens on investors that they’ll abandon these funds. You don't have to take my word for it — the investors have told regulators this themselves, repeatedly. And contrary to the notion that such a flight would be "a good thing … for banks," there's every sign that much of the money will end up in unregistered private cash products that lack the risk-limiting regulation, required liquidity, and transparency of money market funds. The result will be greater risk — not less — for the financial system as a whole.
The steps needed to make money market funds stronger have already been taken. The SEC's 2010 reforms were tested and proven in the severe market stresses of last summer. The unprecedented challenges of Europe's ongoing sovereign debt crisis, the U.S. debt ceiling impasse, and the historic downgrade of the United States’ sovereign debt rating created significant market turmoil and large volumes of shareholder redemptions. Money market funds met those redemptions without incident, without meaningful reductions in money market funds' mark-to-market portfolio values, and without any impact in the broader money market. Today's money market fund is a different—and far stronger—product than its 2008 ancestor.
Finally, Rehm's column perpetuates another fiction—the idea that money market funds are "banks by another name." No one can compare the transparent, liquid, high-quality, short-term, publicly traded securities that money market funds are required to hold with the assets in a bank's portfolio and make that claim with a straight face. Money market funds are designed to limit risk—which is why they don’t need to have mechanisms bolted on to shift risks elsewhere.
Public policy driven by the goal of making the regulated party miserable does not serve the public's interest. Let's hope that financial regulators aren't taking their cue from writers like Rehm.
Paul Stevens is the president and chief executive officer of the Investment Company Institute.