In Barbara Rehm's column "It's Time for Money Funds to Fess Up About Fluctuating Values," she characterizes the $1 net asset value as "a fiction," which is defined at something feigned, invented or imagined.
The truth is that money market mutual fund shares price at a dollar on a daily basis, not because they have promised to repay shares at a dollar, but because the underlying assets are required to meet very stringent credit quality, liquidity and maturity requirements under current SEC regulations, and thus hold their value at $1. And those regulations were strengthened in 2010 by the SEC based on recommendations from money fund providers.
In fact last summer during the European debt crisis, those funds with the greatest exposure fell by just nine one thousandths of a penny ($0.00009). And at the height of the market crisis in 2008, Investment Company Institute research showed that the average calculated NAV was $0.998 and then quickly returned to $1. That doesn't sound like fiction to me.
The ability to transact at the $1 NAV provides a real benefit to corporations, government entities and other money fund users by allowing them to use automated cash management processes, facilitating same day transaction processing, shortening settlement cycles, and reducing float balances and counterparty risk. This stable NAV also provides simplified tax treatment. These are measurable benefits that translate directly into lower costs of capital and higher returns on assets.
The column contains plenty of rhetoric, but no research or evidence, that floating the NAV would make the global financial system more stable. In fact, if money funds go away as Ms. Rehm suggests, then greater risk is placed on the financial system because assets would move to banks or to unregistered investments that don't have the same regulation or transparency.
There's one other critical piece of fiction in the column and it deals with the claim that the financial system froze up in 2008 in part because money funds stopped lending. That is just plain wrong. Liquidity was unavailable because there was a global financial crisis, caused by poor mortgage loans, the failures of Lehman Brothers and AIG, and inconsistent actions by the government in response to these events.
Editor's Note: Federated Investors is a sponsor of money market mutual funds.