The following is reprinted from the October issue of Money Fund Intelligence, which excerpts Investment Company Institute President & CEO Paul Schott Stevens' address from ICI's "Equity, Fixed-Income & Derivatives Markets Conference" earlier this week. His talk was entitled, "Of Black Swans and Money Funds."
Stevens says, "Today, I want to talk about the impact on money market mutual funds, which for so many years have been a steady, predictable mainstay of finance for both corporate and household America. Let me describe for you what has happened and share some insights about ICI's efforts to protect shareholders and others who have such a large stake in the success of money market funds. And then I'll conclude with some thoughts, some very preliminary thoughts, on how the aftermath may alter our industry."
"But first, let me set the historical and economic backdrop for these recent events. Money market funds themselves were born of a Black Swan moment--the explosive inflation of the 1970s. Rapidly rising interest rates laid waste to a banking world governed by Reg Q and its precise limits on what banks and thrifts could pay on deposit accounts. Higher rates were available in the money markets--but the price of entry was steep, because those securities traded in increments of $100,000."
Stevens continues, "The SEC's adoption of Rule 2a-7 in 1983 assured that these funds would follow strict guidelines on credit quality, maturity, diversification, and liquidity. Within these guidelines, money market funds could seek to maintain a steady $1.00-per-share net asset value. Current yields and this stable NAV became key selling points for money funds, positioning them as an excellent cash-management vehicle."
"On that foundation, money market funds grew rapidly. Assets quadrupled from 1984 to 1997, when they first topped $1 trillion. And they tripled again, to $3 trillion, by 2007. As they grew, money funds became a premier cash-management product for both the corporate boardroom and that kitchen table that we hear so much about on the campaign trail. This year, America's households entrusted money funds with almost one fifth of their short-term assets, and corporate treasurers logged almost a third of corporate assets in those funds."
"But for the economy, money funds' role on the other side of the balance sheet is even more important: For Corporate America--as of June, money market funds held more than 40 percent of outstanding U.S. commercial paper, the vital short-term borrowings through which companies finance payrolls, inventories, and trade. For state and local governments--money funds held almost one-fifth of outstanding municipal securities. For the U.S. Treasury--money funds held one-fifth of marketable Treasury bills. For brokers and bankers throughout the land--money funds held at least one-quarter of the repurchase agreements that these institutions use to maintain their liquidity. And for consumers, whose credit-card, home-equity, and auto loans are substantially financed by asset-backed commercial paper held by money market funds. In sum--the $3.4 trillion in assets held by money market funds is vital fuel for the financial engines that drive the American economy."
For the entire text of Stevens' excellent speech, see ICI's website, see the October issue of Money Fund Intelligence, or stay tuned for Part II.
