A recent Wall Street Journal op-ed by Eric Rosengren ("Flirting With Money-Market Madness," Nov. 28) demonstrates how far from reality the Boston Federal Reserve Bank president is willing to go in his quest to blame money market funds for the financial crisis. His remarks would be laughable were they not so outrageous and potentially damaging to the financial system.
Almost nothing Mr. Rosengren says or implies about MMFs is true. MMFs had nothing to do with causing the financial crisis, which was a product of central bank blunders, flawed national housing policy, and failed bank supervisory policies. MMFs were victims of the crisis, not perpetrators. They nevertheless performed admirably in providing liquidity to their shareholders amid unprecedented chaos. Rosengren believes the funds should have provided liquidity to big banks instead. He complains that MMFs liquidated their holdings of bank-sponsored commercial paper rather than holding onto it, even after it became apparent the commercial paper was loaded with subprime mortgages not fit for MMF portfolios.
What Rosengren won't acknowledge is that the government facilities designed ostensibly to support MMFs during the crisis were little more than a backdoor bailout of big banks, which lacked sufficient capital to hold their own toxic commercial paper after MMFs rejected it. The problem he needs to address is not MMFs but rather excessive short-term borrowing by banks to fund their "shadow banking" activities. Rather than fix that problem by appropriate banking reforms, the Fed's solution is to demand demolition of MMFs, which likely would worsen the problem.
MMFs operate with far greater simplicity, safety, transparency, and efficiency than banks. Unlike banks, which multiply risk through leverage, MMFs are completely unleveraged. In the rare event a MMF's assets fall below $0.995 per share, it must immediately close and liquidate, thereby limiting investor losses. Unlike banks, which dropped like flies during the crisis, only one MMF "broke the buck." It still managed to pay its investors $0.99 per share. No other major MMF ever has broken the buck. Unlike government-subsidized banks, MMFs never have cost the taxpayers a dime.
It ill-befits a high-ranking official charged with the public trust to use his office as a bully pulpit to propagate a media campaign aimed at disparaging a highly successful industry that has contributed greatly to the diversity and efficiency of our modern financial system.
Rosengren has become the voice of long-standing Fed hostility to MMFs dating from the 1980s when the growing popularity of MMFs as an alternative to bank deposits exposed the absurdity of antiquated Fed regulatory policies that prohibited banks from paying interest on checking accounts. Congress rejected Fed attempts to quash MMFs and the funds have thrived ever since under Securities and Exchange Commission rules pursuant to the Investment Company Act. The Act imposes strict credit quality, liquidity, transparency, diversification, concentration, and governance requirements. The SEC strengthened these requirements in 2010, before the Dodd-Frank Act was enacted. Nothing in the Dodd-Frank Act suggests Congress viewed MMFs as a threat to financial stability. Nothing in the Act requires any substantive change in their regulation.
In contrast, major bank regulatory reforms remain unimplemented, including liquidity requirements and limits on short-term borrowing. Less than one-third of the banking reforms mandated by the Dodd-Frank Act are in place.
It is useful to be reminded occasionally that the Fed is fallible and been wrong before. There is ample fault with the Fed in the recent crisis as well as prior debacles. Economists, including Ben Bernanke, agree that Fed policies gave rise to the Great Depression. History will reveal that the Fed has not studied the effects on investors, the financial system or the economy of the loss of MMFs, which investors, market participants, and economic experts have said would be damaging and unpredictable.
The public should read Rosengren's remarks with skepticism. Readers who want a more fact-based view can read the many thoughtful comment letters in the SEC's public comment file on MMFs here and here.
Melanie Fein is a former senior counsel to the Board of Governors of the Federal Reserve System, now in private practice. Her clients include money market funds.