"Money Funds Are Ripe for 'Radical Surgery'" writes Bloomberg columnist Jane Bryant Quinn in a commentary piece today. She mysteriously tries to resurrect the Group of 30 proposal (see Crane Data's January 19 News "Group of Thirty Recommendation Poses Threat to Money Market Funds"), saying, "I'm among the last people standing who think that Paul Volcker is right about money-market mutual funds. They pose a systemic risk to the financial system and need a radical fix."
She continues, That's not going to happen, at least not now. The Securities and Exchange Commission proposes to tighten up the regulations governing money funds but only by a little bit. The new rules won't force much of a change in the way that money funds operate now."
The Bloomberg article says about bank deposits vs. money funds, "There's a difference between the two: Banks have to hold reserves against demand deposits and pay for Federal Deposit Insurance Corp. insurance. Money funds offer similar transaction accounts without being burdened by these costs. That's why they usually offer higher interest rates than banks."
It adds, "In most cases, money-fund sponsors have come to the rescue of their funds if any question arose about the $1 value of their shares. Peter Crane, president and founder of Crane Data LLC in Westboro, Massachusetts, says as many as one-third of the funds will have needed support by the time this global financial squeeze abates."
"But you can't be sure that sponsors will always be willing or able to bail out their shareholders, says Jack Winters of Hingham, Massachusetts." He says, "Dealers supported auction-rate securities for 25 years until their financial situation precluded it."
The Bloomberg piece adds, "Retail money funds, conservatively invested, aren't as vulnerable to runs as institutional funds and may be safe in their present form. The danger lies with the hot-money institutions that can pull billions of dollars out of a fund in a millisecond. Of course, big investors could also start a run on money funds that fluctuate too much in price. But they would be less likely to sell if they'd lose money on the trade, Winters says."
Finally, Quinn's article says, "The SEC didn't propose a floating NAV. It merely asked for comments on the idea." It quotes Crane, "It's off the table. The crisis is over. The need for radical surgery has lost its impetus." But the article adds, "That is, until the next time. Will money funds be the only institutions 'too big to fail' to escape the costs?"
