Click here to watch the SEC's 2pm EDT Webcast "Money Market Funds and Systemic Risk" Roundtable here.... The Investment Company Institute's President & CEO Paul Schott Stevens wrote a response to yesterday's Wall Street Journal editorial, "Taxpayers and Money Market Funds," which appeared to support a floating NAV for money market funds. (See yesterday's "Link of the Day".) Stevens response to the WSJ says, "Your editorial 'Taxpayers and Money Market Funds' (Review & Outlook, May 9) ignores the substantial progress that has already made money market funds more resilient in a financial crisis, while blithely dismissing the economic disruption and proliferation of risks created by a long-discredited 'solution.' The risks of money market funds have always been clearly disclosed, and investors are told in every advertisement, prospectus, and statement that their shares in these funds are not insured. No one can miss the fact that money market funds are not guaranteed."
Stevens explains, "For almost 40 years, money market funds have had an unmatched record of stability. When cascading bank failures shook the money markets in 2008, our industry tackled the vulnerabilities for money market funds exposed by that episode head-on. Our funds voluntarily raised standards for credit quality, shortened portfolio maturities, and increased disclosure. We endorsed new liquidity standards that now require prime money market funds to have 30 percent of their assets liquid within five business days. At current asset levels, that's $490 billion in liquidity."
His letter continues, "We took these steps before the Securities and Exchange Commission acted -- knowing that reforms would raise costs and constrain yields -- because we understand that investors prize the stability, simplicity, and convenience that money market fund provide. How else to explain the fact that stable-value money market funds have 7.5 times the assets of short-term bond funds, which are paying sharply higher yields? The strong demand for money market funds, even with near-zero yields, should give clear warning that fundamental changes to this product will cause severe market disruptions."
The ICI President writes, "We continue to work on sound ideas to reduce risks and make these funds stronger. But the notion your editorial endorses -- floating the value of money market funds -- does nothing to reduce risks. We saw how that experiment played out with floating-value ultra-short bond funds in 2008. Those funds' investors pulled out 60 percent of their assets when the funds' values dropped. It's clear that experiencing routine fluctuations of a few basis points does not 'condition' investors to sit tight when they're hit by a black-swan market."
Stevens adds, "While there's little to gain from floating funds' value, the costs are enormous. Key economic players from across the private and public sector have roundly rejected such proposals. Issuers of commercial paper and municipal securities count on money market funds to finance their payrolls, inventories, and public projects from bridges to hospitals. They've clearly said they don't want to see this crucial financing -- the lifeblood of the economy -- disrupted. Yes, markets will eventually adapt: markets have a way of finding prices that will accommodate even the most harmful policies. But why pile another costly and disruptive regulatory burden on a still-fragile economy, for such illusory gains?"
He also says, "Floating the value of money market funds will drive away legions of investors, including businesses and institutions that are required by law or policy to hold cash in stable-value accounts. Retail investors will also flee, because they want same-day access to their assets that floating-value funds can't provide -- and don't want to turn every transaction with their fund into a taxable event."
Finally, Stevens comments, "During the brief federal guarantee program for money market funds, taxpayers collected $1.2 billion in fees from these funds without paying a dime in claims. We're committed to ensuring that taxpayers are never on the hook for money market funds. But the 'solution' you advocate is all cost with no benefit. We need to preserve the value and key characteristics of money market funds."
