U.S. Treasury Secretary Timothy Geithner gave Testimony before the Financial Crisis Inquiry Commission yesterday on "Causes of the Financial Crisis and the Case for Reform" and briefly mentioned money market funds and the pending President's Working Group report. Money funds and regulations were also a brief topic at the ICI's General Membership Meeting in Washington. We excerpt the money fund-related highlights below.
Geithner said of the "parallel banking system," "A large parallel financial system emerged outside of the framework of protections established for traditional banks.... This parallel system came in many shapes and sizes. Independent investment banks like Lehman Brothers and Bear Stearns grew in size and financed themselves in the overnight repurchase agreement, or 'repo' markets, which rely on assets or securities as collateral. Asset-backed commercial paper (ABCP) conduits and structured investment vehicles (SIVs) were used by banks and a broad range of other financial institutions as funding vehicles for different types of assets.... These institutions and funds were financed by institutional investors and by money market mutual funds, which purchased their short term commercial paper, or lent to them overnight in the repo markets secured by various forms of collateral."
He then said about "These reforms will give the Federal Reserve the authority to build a more stable funding system, take action to address the unstable aspects of the short-term repo markets, and ensure that these markets are used much more conservatively in the future. These steps will give clear authority to set risk management requirements for these markets, including capital standards, set standards for collateral requirements, and to help ensure that settlement procedures are robust. They will also create enforcement authority to compel corrective actions as risks build up, or when risk-management is inadequate. These authorities will also reinforce stability and liquidity even in times of market stress such as a terrorist attack or acute financial crisis."
Finally, Geithner mentioned "Higher Standards for Money Market Mutual Funds," saying, "The SEC recently enacted new rules to strengthen liquidity, credit standards and disclosure in the money fund industry. More work remains to be done in this area, and the President's Working Group on Financial Markets is preparing a report setting forth options to reduce the susceptibility of money funds to runs."
Members of the mutual fund industry were also discussing money market funds yesterday at the Investment Company Institute's 2010 General Membership Meeting. The ICI's "Highlights" page says, "In a wide-ranging conversation at ICI's GMM, a leadership panel discussed the way forward for the fund industry and investors. Among the topics covered were key lessons of the recent financial crisis, the stable net asset value (NAV) for money market funds, and creating a fiduciary standard for brokers.... [Greg] Johnson [of Franklin Resources] mentioned that in the larger financial reform debate, the stable net asset value (NAV) had been questioned. McNabb, Johnson, and Walters stressed that the stable NAV must be retained. A stable NAV provides investors with the stability they crave and funds short-term lending for corporate America."
The ICI highlights page also said, "In a panel discussion moderated by ICI's General Counsel Karrie McMillan, panelists James F. Febeo Jr., Vice President of Government Relations, Fidelity, and Richard Y. Roberts, Principal, Roberts, Raheb & Gradler, LLC discussed upcoming and past federal legislation, along with other related matters.... In reference to the numerous delays in the release of the President's Working Group (PWG) report on money market funds, Febeo said that because of recent reforms announced by the SEC to Rule 2a-7, the PWG report may no longer be essential in some ways. Plus, he noted, the current climate of debate surrounding financial regulatory reform makes it unlikely that the report will be released soon, lest it 'muddy the waters'."
See also MarketWatch's "Fund company leaders voice regulation fears", which says, "Money-market muddle At a panel on Thursday, fund executives also voiced concerns about proposals to regulate the money-market fund sector, in particular suggestions that funds' share price should be allowed to float." They quote Bill McNabb, CEO of Vanguard Group, "Our investors really value that $1 a share NAV. We think it's very important that ... continue."
