Money Market Mischief

Are money funds too big to reform?

At the heart of the Financial Crisis were money market funds. When Lehman filed for bankruptcy in September of 2008, one of its creditors was The Reserve Primary Fund, an independent money fund with $125 billion in assets. Because it held almost $800 million in Lehman debt, it was forced to mark down its stable Net Asset Value, causing investors to take a loss.

Financial chaos ensued. Over $500 billion fled the $13 trillion money market sector. While the Primary Fund was the only one to “break the buck,” at least 62 other money funds had to receive support from their sponsors or parents. Companies that borrow from money funds lost their funding and went into a panic. Millions of workers were laid off. The run on money funds intensified the recession.

The SEC was charged to study the systemic risk and develop policy responses. The core of the problem is money-market funds’ stable Net Asset Value, which incentivizes a rush for redemptions if holders sense trouble. The SEC came up with two proposals (that have elicited thousands of comment letters): one to impose “gates” on redemptions, and the other to force money funds to float their price.

But nothing fundamental has been done. The stakes are huge—for the economy, and money-fund providers—and legislators are being lobbied by voters, advocates, think-tanks, and, of course, the financial industry. Any new rule will gore someone’s ox.

The humble money fund has become a source of financial and economic insecurity. Something has to change.

Douglas R. Tengdin, CFA

Chief Investment Officer

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