Yesterday's Wall Street Journal editorial page took another shot at money market mutual funds in its Review & Outlook piece, "Money-Market Mayhem," which was quickly followed by outrage in the investment management community and a response from the Investment Company Institute's Paul Stevens. The Journal writes, "Amid the Greek mini-panic this month, did you notice the really shocking news? To wit, U.S. regulators are worried about the "systemic risk" posed by the exposure of American money-market funds to European bank debt."
The WSJ Editorial explains, "That's right, nearly three years after the panic of 2008, our all-seeing regulators have somehow not fixed what was arguably the single biggest justification for government intervention at the time. In 2008, the feds felt obliged to guarantee all money-fund assets after they let the Reserve Primary fund pile into bad Lehman Brothers paper, Reserve broke the $1 net-asset value, and in the following days some $400 billion fled prime money funds. We'd have thought our regulatory wise men would have fixed this systemic risk before all others."
It adds, "Yet now we learn that since 2008 U.S. money funds have been allowed to pile into European bank debt even as everyone knew those banks had stocked up on bad European sovereign paper. The Treasury is even saying privately that the U.S. needs to support the European bailout of Greece lest European banks fail, U.S. funds take big losses, and we get another flight from money funds. Can this possibly be happening? Yes, and this time it's an entire industry as opposed to a particular fund. Half the assets in U.S. prime money market funds were invested in European banks as of the end of May, according to Fitch Ratings."
Finally, the Journal piece says, "As for the mutual fund industry, so long as funds can enjoy an implicit taxpayer guarantee while hunting for higher yields in Europe or elsewhere, don't expect them to willingly accept reform. The industry has been working to come up with a self-regulatory safety net that would stop a run against all funds if one or more failed, but its fail safe includes access to the Federal Reserve's discount window. In short, a government lifeline. Congress isn't helping, as a House Financial Services hearing on Friday that mostly took the industry line showed."
ICI President & CEO Paul Stevens responded late Monday with a piece entitled, "Wall Street Journal Editorial Gets It Wrong Again on Money Market Funds, written by Mike McNamee. It says, "The Wall Street Journal posted another misleading editorial on money market funds. ICI President and CEO Paul Schott Stevens has submitted a letter to the editor in print and online to respond. Here is the text of his submission."
He writes, "Once again, a Journal editorial has misstated the facts and twisted the analysis of important issues surrounding money market funds ("Money-Market Mayhem," Review & Outlook, June 27). Your editorial vastly overstates the risks to U.S. money market funds in the Greek debt crisis. For more than a year, U.S. prime money market funds have had no direct holdings of Greek debt, sovereign or private. Yes, these funds hold the debt of European banks. But these are dollar-denominated, short-term liabilities of highly rated global banks that borrow in the U.S. money markets to help finance their U.S. and other dollar-based operations. Of the banks in prime money market funds' portfolios, in every case the bank's direct exposure to Greek government debt is less than 1 percent of the bank's total assets -- and for most of the banks, it's much less."
Stevens continues, "Your editorial also promotes the myth that the money market fund industry and regulators have failed to address the risks revealed by the financial crisis. This is false. Six months after the Reserve Primary Fund broke the dollar, the fund industry voluntarily adopted higher credit standards, shorter portfolio maturities, greater portfolio transparency, and explicit liquidity requirements for fund portfolios. In January 2010 -- six months before the Dodd-Frank Act passed -- the Securities and Exchange Commission adopted regulations based largely on those standards. These measures have made money market funds considerably more resilient: prime funds, for example, today hold $660 billion in assets that are liquid within one week, far more than the $370 billion outflow experienced in the week of Lehman Brothers' failure. The fact is, regulators did address money market fund risks "before all others.""
He explains, "What I find most puzzling is the Journal's choice of money market funds as the whipping boy for systemic risk. Money market funds represent a clear case where market discipline reinforces strong regulatory standards. The risks of money market funds are clearly disclosed, as are their portfolio holdings and mark-to-market share values. We tell our investors, in virtually every communication, that money market funds are not insured or guaranteed. Our industry did not ask for a federal guarantee; insisted that the guarantee program be limited; applauded the end of the guarantee program; and has worked hard to ensure that no government guarantee, explicit or implicit, is ever needed again."
Finally, Stevens writes, "'Mayhem' comes in many forms. I would suggest that misstating the facts and twisting the analysis regarding a vital segment of our economy, in a time of global uncertainty, is creating mayhem where none exists."
