Apparently, SEC Chairman Mary Schapiro is a very sore loser. She writes in today's Wall Street Journal an opinion piece entitled, "In the Money-Market for More Oversight." Schapiro says, "Four years ago this week, amid the financial crisis, the U.S. Treasury Department took the unprecedented step of putting taxpayer dollars on the line to stop a run on money-market funds. That run exacerbated the crisis and helped spread its harmful effects from Wall Street to Main Street. It all occurred after the share price of a relatively unknown money-market fund, the Reserve Primary Fund, fell below $1, sunk by commercial paper from the bankrupt Lehman Brothers. This phenomenon, known as "breaking the buck," meant that investors would get back less than they invested. Not wanting to take a loss, Reserve Primary Fund investors pulled their money out. It was a classic run."
Her editorial continues, "The experience was eye-opening for policy makers, who saw firsthand the susceptibility of money-market funds to destabilizing runs. While the Securities and Exchange Commission adopted rules in 2010 to make these funds more resilient, I said then and continue to believe that further meaningful reform is essential. There is a substantial consensus on the need for such reform—proponents as diverse as The Wall Street Journal editorial board, columnists at the New York Times, and current and former regulators from both political parties have called for stronger rules."
Schapiro comments, "The SEC's post-crisis 2010 reforms were important but didn't address these structural flaws. The purpose of those reforms was to increase the resiliency of money-market funds, primarily by instituting new liquidity requirements and mandating significant new disclosure of funds' holdings. But nothing in those reforms was intended to make money-market funds better able to absorb losses. Nor were the reforms intended to reduce the likelihood of mass redemptions when investors fear losses. That is why, at the time, I called them a first step."
She adds, "While I respect the views of my fellow SEC commissioners, a majority of them recently chose not to publish the reform proposal for public comment. The decision at least provided some clarity: It gave others in government a green light to act where the SEC hasn't. At this point, the Financial Stability Oversight Council is the right organization to tackle this issue. Under the 2010 financial-reform legislation, Congress created this council to serve as a cross-regulatory body tasked with identifying risks to financial stability and promoting market discipline."
Schapiro writes, "The council already has signaled its support for action on money-market funds. In each of its two annual reports, the council identified the susceptibility of these funds to runs as a risk to financial stability and encouraged the pursuit of reform. Now the council must consider what actions it can take to reduce this systemic risk. The options include, among others, the possibility of a formal recommendation to the SEC to apply new or heightened standards to money-market funds. The SEC would then be required to apply those standards -- or within 90 days explain in writing the justification for not applying them. In addition, the council has the ability to designate certain entities as systemically significant and subject them to prudential regulation by the Federal Reserve Board. Individual regulators also can examine the sponsorship and reliance on money-market funds by the entities overseen by the regulators, who would be able to consider whether additional limitations or controls are necessary."
Finally, she adds, "A run on money-market funds hurt our financial system once and American taxpayers had to backstop them. The Financial Stability Oversight Council and all who care about financial stability must act to prevent it from happening again."
In other news, Bloomberg writes "Return of FDIC Limits Seen Cutting Savers' Rates". The story says, "Money-market funds may be swamped with a flood of cash that will drive interest rates even lower for savers, unless Congress acts by the year's end to continue unlimited federal insurance on certain bank deposits. The BGOV Barometer shows $2.3 trillion is sitting in non-interest-bearing bank accounts, a gain of 90 percent since the government in 2008 loosened limits on coverage by the Federal Deposit Insurance Corp. to help stabilize the banking system. Of that, about $1.4 trillion is in transaction accounts larger than $250,000, the previous ceiling for insured deposits, FDIC data show."
Bloomberg explains, "Restoring the limit might prompt holders of such accounts, including corporations and high-net-worth individuals, to withdraw the cash and turn to short-term money markets. Such a flood of cash would potentially drive rates lower on a range of consumer-investment products, such as money-market mutual funds and certificates of deposit."
The piece quotes Morgan Stanley Strategist Subadra Rajappa, "People are not paying nearly as much attention as they should to this potential cash waterfall. If even 10 percent of the cash in these accounts is taken out because people were concerned about the safety of their money, there could be $140 billion entering the Treasury and repo markets. This will have the effect of moving money-market rates lower, which would definitely not be good for the money funds."