John J. Brennan, Chairman of Vanguard gave the keynote address, "Money Market Funds: Weathering the Financial Crisis," at yesterday's U.S. Chamber of Commerce Center for Capital Markets Competitiveness seminar in Washington, "The Money Market Mutual Fund: Why it Matters." Brennan vigorously defended the money fund model, saying money funds "offer investors a 'hat trick' of safety, liquidity, and yield, while helping fund businesses and governments efficiently" and calling money funds the "single greatest intermediation vehicle ever invented".
He told attendees, "[T]he past 18 months have been one of the greatest learning experiences that we could have asked for with respect to the markets generally, the money markets more narrowly, and money market funds specifically.... [T]wo things are very clear. First, the American economy needs deep and robust money markets to function effectively. And, second, the money market fund industry is vital to ensuring that those markets work well."
He described the work of the ICI's Money Market Fund Working Group and said, "In the end, we produced a comprehensive 216-page report on money market mutual funds, complete with the history of the funds, an analysis of competing products and ideas, and an examination of the events of last September when The Reserve Primary Fund broke the buck. And, in the report, we made recommendations for improving money market funds. These recommendations were informed by the market events of the past 18 months, but, more importantly, they are based on three-and-a-half decades of experience serving money market fund investors."
He continued, "While the main 'product' of our efforts was a formal list of recommendations to improve money market funds, to me the sum of our great collective effort was the reaffirmation of a single, long-standing concept which was, I admit, a going-in bias of mine (and, I suspect, of many others in the industry). The belief is this: The money market mutual fund is the single greatest intermediation vehicle ever invented. Period. It's a well orchestrated, highly regulated, and mutually beneficial handshake between two parties."
"For investors, the money market fund has provided what you might call the 'hat trick' of safety, liquidity, and yield -- for more than 35 years. For issuers, it has meant simple, low-cost financing, whether you're J.P. Morgan or the local school district.... It's almost alchemical in nature. Better returns for investors than they can receive from other types of liquid, safe investments like bank accounts. Lower costs of financing than issuers can find from other sources. A true win/win situation," said Brennan.
Money funds "are short-term, transparent, very high-quality, and very low-cost" he says, adding, "Money market funds serve their investors and the issuer community at a cost measured in basis points rather than percentage points." Brennan also told attendees, "Investors seek that hat trick of safety, liquidity, and yield. In that order of importance. Safety, liquidity, and yield. Yield is essentially a byproduct of the first two (safety and liquidity) powered by low costs. One of the fascinating things about these client needs is that they are the same for all investors, from the largest institutions with billion-dollar accounts to my kids putting their summer earnings to work."
Finally, he said, "And it has worked. It has worked far better than unregulated cash management pools or 'near' cash vehicles which, as we've seen, can run into problems. In the stressful environment of 2008 and 2009, highly regulated money market funds proved to be the best options for investors.... The history of money market funds has been a great success story. But, the great American humorist, Will Rogers, put it best when he said, 'Even if you're on the right track, you'll get run over if you just sit there.' [O]ur industry has never been satisfied with 'just sitting there' and taking what we've learned -- again, over the long-run and in the short-term -- to make money market funds and the money markets even more effective for the next 35 years than they've been in the past has to be our goal."
