As we wrote in Friday's "Link of the Day" (Bloomberg's "JPMorgan's Staley Calls Money Funds 'Systemic Risk'"), James Staley, head of JPMorgan Asset Management, reportedly asserted in Davos, Switzerland, that "the $4 trillion money-market fund industry is the 'greatest systemic risk' to the financial system that hasn't been adequately addressed." The Bloomberg article has since been updated to include the outraged reactions of the money market fund industry, which calls the accusations "preposterous". We expect there to be even stronger responses to Staley's comments in the coming week.
Bloomberg quoted Staley, "The people who brought down Lehman and almost Bear Stearns weren't the banks, they were the money funds." The article wrote, "JPMorgan's Staley blamed money funds for Lehman's collapse and the near bankruptcy of Bear Stearns Cos. last year. The funds, which typically hold highly rated, short-term debt instruments, were forced to pull their money from the firms when they saw signs of trouble, he said."
The updated piece adds, "Paul Schott Stevens, president of the Investment Company Institute, the fund-industry trade group based in Washington, called the idea that money funds crippled Bear Stearns or Lehman 'preposterous' and criticized the Group of Thirty's proposals." He says, "Most of the people who say these things know virtually nothing about how money-market funds are regulated. These are extraordinarily far-reaching recommendations that were made without any thought. If we get rid of the current model, what would substitute for it?"
Bloomberg also quotes Joan Swirsky of Stradley Ronon Stevens & Young, that the "recommendations could have the unintended effect of drawing money out of the commercial-paper market". She says, "The two new products [proposed in the recent Group of 30 report] put together could have less appeal than current money-market funds, causing the assets they invest in to lose value."
We expect much more discussion and debate on possible changes to the regulation and structure of money market mutual funds. But we do not expect suggestions of radical change, such as those proposed by The Group of 30, to be adopted. The likely disruption to a still fragile money market would be far too dangerous, and investors will almost certainly strongly oppose any change which substantially reduces the attractiveness of their money market investment options. Look for more news and analysis next week, and in the pending February issue of `Money Fund Intelligence.
