NYT on "How Mr. Volcker Would Fix It"
The New York Times (Saturday) writes "How Mr. Volcker Would Fix It" in a column by Gretchen Morganson. She cites a recent Volcker speech and interview, saying, "One is the potential for problems in the huge industry of money market mutual funds, which operates "in the shadows of the banking system," he said. Although these funds are typically managed conservatively, he said, they are vulnerable to runs, as occurred when Lehman Brothers collapsed." It quotes Volcker, "Because they are not subject to reserve requirements and capital requirements, they are a point of vulnerability in the system. It is really interesting that they did so much lending to European banks. They had to pull back a lot, aggravating the pressures on the European banks." The Times adds, "Money market funds held $2.63 trillion as of last Wednesday, and, Mr. Volcker said, many people mistakenly think that these funds are as safe as bank accounts. But the safeguards on bank deposits -- strong bank capital requirements and federal deposit insurance, for example -- do not exist for most money market funds. There is also little official surveillance of the funds' investment practices [sic].... In a recent letter to the Financial Stability Board, an international organization charged with developing strong regulatory and supervisory policies for financial institutions, the Investment Company Institute said: "We do not believe banklike regulation is appropriate, necessary or workable for funds registered under the Investment Company Act of 1940." An alternative, Mr. Volcker said, would be to require money market funds to value their assets every day to reflect market fluctuations. This would put an end to the idea that if you put $1 into a money market fund you will always get $1 out, no matter what. "It seems to me if you are a mutual fund, you should act like a mutual fund instead of a pseudobank," he said." In other news, The Sunday Boston Globe also featured, "Investors fleeing money markets", which says, "Money market mutual funds, long one of the most dependable places for people to stash their cash, are losing their appeal."
