While we're still digesting and transcribing the SEC's 3-hour marathon Roundtable Discussion on Money Market Funds and Systemic Risk (see web video here), we've managed to select some of the standout quotes from the first half of the event below. Overall, the event was an interesting exercise, but its focus on the more radical "long-shot" options listed in the President's Working Group report and short duration made it unlikely to have advanced the debate much. Nonetheless, the forum did serve to highlight many of the major issues and to refine some of the arguments for reform. It appears that the debates are still just getting started though. (We hope to have a full transcript by early next week.)
After SEC Chairman Mary Shapiro's remarks (see yesterday's "News"), SEC Division of Investment Director Eileen Rominger said, "The PWG report concluded that MMFs are susceptible to runs. Do panelists agree with this assessment? Arnold & Porter LLP John D. Hawke, Jr. responded, "It's important to note that runs on money market funds are vastly different than runs on commercial banks ... The investments are very short-term. Their assets are 'money good'. I think it paints a misleading picture to say that money market funds are susceptible to runs."
Fidelity's Bob Brown commented, "I think the run developed because there was no transparency." He noted that Fidelity Cash Reserves "experienced a 2 percent decline in net assets" during Sept. 2008 while they saw a "40 percent reduction in their institutional prime fund". Plaze added later in this discussion, "In some ways, transparency cuts both ways."
While CVS Caremark Senior Vice President and Treasurer Carol A. DeNale said, "I do not look to the money market funds for yield." Capital Advisors added, "Investors were voting with their feet." Pan explained, "Because of their own success [money funds] attracted the attention of some of the shadow banking products.... When we experienced problems with ABCP, we saw the pickup in European banks.... That's another way of saying that we also need to address the correlation risk of the money funds ... to reduce the systematic risk."
As expected, Paul Volcker blasted away at money funds, "Are they prone to a run? The answer is obviously yes.... You had a structural problem with an organization that had no backstop, no ... support.... MMF were pure regulatory arbitrage.... It is a shadow bank. Do you need shadow banks or do you make them real banks?"
Hawke countered, "A lot of people out there think money market funds are very good for them. They find them enormously useful for cash management, for liquidity, retail investors put a high value on the transaction account features of those funds. I think there's a great danger in looking at all sources of mechanisms for reinventing the money market funds. The danger is there will be unintended consequences.... The basic problem that The Reserve Fund caused is how you deal with emergency liquidity needs. And I think that ought to be the focus. How do you deal with those extraordinary situations where there's tremendous market disruption, not caused by money market funds, as to which they are the victims. How do you deal with the demand for liquidity that comes when investors wanting to cash in?"
Erik Sirri, one of the professors on the panel, proceeded to confuse listeners with talk of guarantees. He said, "The idea of a guarantee ... is a trait of all financial intermediaries. It seems to me ... 2008 wasn't the first time. What we really need to figure out is how you pay for it, and who's the guarantor." The Bank of England's Paul Tucker added, "Once the State steps in ... then the State is also entitled to [its] say.... Either take away or make explicit the guarantee."
Brown asked, "What would bank-like regulations provide the money fund industry? We've studied our market value NAVs back over the past 20 years and we would consider a significant deviation from the amortized cost NAV to a market value NAV of 10 basis points. I think the integrity of the rule 2a-7 speaks loudly with those numbers."
The FDIC's Sheila Bair commented, "They will run.... And that's why we have deposit insurance. So we got into this situation where money market mutual funds have had the stable NAV. I believe a fiction.... Just because your term is short, doesn't mean that the investment is risk free.... It was a model that was broken. Now it seems we have a moral hazard issue.... I understand from a business perspective maybe the status quo is just fine.... But regulators should be worried about moral hazards.... It seems to me your customers want money market like bank accounts.... They are not risk-free investments."
IMMFA's Travis Barker responded, "They're there to provide institutional investors with diversification.... It's not clear to me that a world without money market funds would be better.... Fundamentally the product exists for legitimate risk mitigation reasons." Pann added, "Institutional investors would like to have some substitute for bank deposits.... They have to worry about their counterparty risk."
GFOA's Kathryn Hewitt commented, "It's very important to us to be able to put a dollar in and to get a dollar out. We're trying to balance investments ... that we are going to get par back for.... If we don't have it, if we have a fluctuating one, we won't be in it.... With our daily operating cash that we need to pay our bills with, that, we need to have stability for.... If interest rates are 5%, we shouldn't be earning 1%. We need the safety, stability of the $1 NAV."
CVS's DeNale added on the floating NAV, "We will not do it. We will pull out of money market funds.... This is not a product that corporate America can back.... We do not just invest in money markets. We invest in CP. The money market is just an avenue for diversification. I do not expect to be picking up different yield for my money market. We're looking for diversification for my portfolio.... Corporate accounts were not guaranteed dollar for dollar. There was a run from banks too. So I think to say the money markets had a run on it and to say other products didn't, that's not true.... How did S&P and Moody's rate Lehman as an A-1, P-1? I think we're all forgetting ... this wasn't just the Reserve fund that created the run.... Goldman Sachs and MS were about to fail. AIG had to be bailed out.... To say that the Reserve fund caused the run is very naive."
Finally, Barker commented, "The purpose of the floating NAV is to change the psychology. [But] I don't see any evidence to that in practice. If you look, for example, at the German money funds, they had a run.... The floating NAV doesn't address the issue.... This changing the pricing structure doesn't change the outcome, which is making investors less likely to run in the event of a crisis."
