Elizabeth Warren, chairman of the Congressional Oversight Panel for the Troubled Asset Relief Program, spoke last week at the Bloomberg Washington Summit (see video here) and briefly discussed money market mutual funds and the government's supposed "implied guarantee."
She told Bloomberg, "The big question with the guarantees [is] what do we do about the implicit guarantees? Look right now at money market funds. We rushed in on September 19, a year ago, when the money market funds were about to 'break the buck.' We took a deep breath and suddenly realized, if it breaks the buck and people flee money market funds, we don't have enough liquidity in our system. So, I understand the reason, but we jumped in on money market funds."
Warren continued, "They paid a substantial fee and ... made a profit. We guaranteed those funds. We didn't have to pay out on them and we got fees from the companies that had the money markets. But that guarantee expired on September 18 of this year, very quietly. Is there anyone in left America who doesn't believe that if money market funds threaten to break the buck again that the Federal government will not come rushing back in?"
She said, "So there's, in my view, an implicit guarantee for which those money market funds pay nothing, and we as taxpayers have no protection. But we're operating now with a new implicit guarantee. It distorts the market and changes risk-taking behavior, and that can't be right."
See also the Congressional Oversight Panel's "Guarantees and Contingent Payments in TARP and Related Programs" report, which discusses the Treasury's Temporary Guarantee Program for Money Market Funds (TGPMMF). (Look for more coverage on this report in coming days.)
