Mercer Bullard, President of Fund Democracy and Associate Professor of Law at the University of Mississippi School of Law, testified recently before the U.S. Senate's Committee of Banking, Housing and Urban Affairs. Bullard presented on "Enhancing Investor Protection and the Regulation of Securities Markets" and had some strongly supportive comments on money market mutual funds. We excerpt from his statement below.
Bullard told the Senate last week, "[M]utual funds have been a singular success story in the midst of the current crisis. Money market funds arguably have been the best illustration of this success. As often happens when those who succeed are surrounded by failed competitors, however, some have responded to the failure of a single retail money market fund -- the first in history -- by demanding that money market funds be converted to and regulated as banks. A former Fed chairman explained this position as follows: 'If they are going to talk like a bank and squawk like a bank, they ought to be regulated like a bank.' The problem with this argument is that money markets do not fail like banks."
He continues, "Since 1980, more than 3,000 U.S. banks have failed, costing taxpayers hundreds of billions of dollars. During the same period, two money market funds have failed, costing taxpayers zero dollars. The lesson that the Group of 30 takes from this history is that it is money market funds that should be regulated as banks. The lesson that Congress should take from this history is that banks should be regulated more like money market mutual funds.... [B]anks routinely fail because they are permitted to invest deposits that can be withdrawn at a moment's notice in illiquid, long-term, risky assets. In comparison, money market funds invest in liquid, short-term, safe assets. The Group of 30 has disparaged money market funds as 'underscor[ing] the dangers of institutions with no capital, no supervision, and no safety net,' yet the extraordinary stability of money market funds relative to banks makes a mockery of their argument."
Finally, Bullard says, "It is banks that should be regulated like money market funds, with the investment of insured bank deposits being limited to liquid, short-term, safe assets.... Money market funds have been a paragon of stability because they are permitted to invest only in a diversified pool of short-term, high-quality assets." But he veers from the fund industry party line with the comments, "The answer to whether money market fund insurance should be made permanent seems obvious. Terminating the temporary insurance program could lead to another run on money market funds and require that the program immediately be restored.... The question of whether there is an implied federal guarantee of money market funds has been answered."
