Our Tuesday Crane Data News excerpted from Federated Investors' Q2 earnings conference call (see "Squam Lake Buffer Not Practical Solution Says Federated's Donahue"). Today, we quote from the Q&A section of the call, often the most interesting part of any earnings call. When asked about building capital for the possibility of future regulatory requirements, President & CEO Chris Donahue commented, "We've been looking at these ideas for several years now and it is a constant situation, where because money market funds are not perfect, people keep coming up with ideas. And there's a lot more ideas that people could come up with, that will still be studied."
He continued, "So I would say that it would be wise for somebody like Federated to not allow that to restrain us from moving forward. We don't think they're going to be doing anything that would kill the money market fund business in any event. All of the ideas are always couched in terms of 'study more' and then even the FSOC recently mentioned things like, 'in order to increase stability, market discipline and investor confidence, things should be studied'.... I think when the verdict comes in of all of the studies, you will find the money market funds standing there, though ... imperfect, demonstrating the resiliency they have to customers and in the marketplace."
Donahue also said, when asked about what proposals are more likely, "Well, it is very hard as I said for us to make a judgment about which one of these things can work when we don't initially perceive their workability. They didn't like the polite capital ideas that Fidelity had with 40 or 50 basis points of buffer. They didn't like the liquidity bank, which took care of the major problem that occurred in 2008, mainly the liquidity of the whole system. So they get down to ideas which have not shown themselves to be workable. Several percentage points of capital is neither economic nor viable in terms of maintaining the existence of prime funds. So it is really hard for me to try and say which one of these things is ahead of the other."
He continues, "If you do, however, look at some of the phrases they have used, they talk about something called 'deterrence to redemption.' I don't know exactly what they mean by that, that's a quote out of FSOC, but if what they are talking about are some pretty legitimately ideas that we think could work. For example, the way we did the Putnam deal back in the day.... [The] Putnam board decided to hit pause on redemptions for a week, and then turned the whole fund over to us, and there was plenty of liquidity in the system because the Fed opened up the windows to buy good paper. So notice there was no credit maneuver here it was all on liquidity. Well, if you give the board the right to do that without forcing a liquidation that would be an interesting one."
Donahue explained, "Another one on that would be, 'Well, what about redemption in kind?' It's been discussed many times. There is an example of a fund, the AMR fund, who basically said they were going to do a redemption kind and that ended the redemptions. I don't know if that is what they have in mind or not.... One other idea which was put out earlier on ... was to simply say that if you run into a reserve fund then take the 3% and set that aside and give everybody else daily liquidity at par of the 97% of the fund that is there and proceed down that road. Maybe that's what they mean by 'deterrence to redemption'. But at this point there is a lot of work that has to be done if they're thinking about doing the things that Squam Lake has been talking about."
Finally, Donahue was asked whether recent events would bolster the case for minor changes to money funds. He said, "The answer to that is yes. I think you already have seen it for 40 years of withstanding a lot of stuff in the marketplace. And I believe that money market funds came through the 2008 crisis very, very well, though dented. And I think they came through very, very well and are coming through very well all the noise associated with the Greek and the European situation. I think when we're able to look back on this, on the debt ceiling issue, that you will find the same thing. And part of the reason for that is the underlying resiliency of the funds themselves coupled with the desire of the investing public to use these funds for their cash management purposes. And these are two powerful ingredients in helping the overall economy."
