Federated Investors CEO Chris Donahue presented yesterday at Citi's 2012 Financial Services Conference in New York. He said, "I'll bet nobody wanted to hear about money market funds. Well, it used to be that way. But now it is no longer that way. I'm happy to talk about money market funds because when I go home nobody asks me about them. Despite the media, the regulators, low interest, lots of issues, the attractiveness of politicians, media, etc., this remains a resilient, strong business [with] 30 million individuals in this country in these funds at $2.7 trillion."
Donahue continued, "Now in terms of waivers, yes waivers are there. We talked about that on the [earnings] call and we said that we expected the wavers to be about $27 million dollars in operating income here in the first quarter. If you force me to go over under that at this point, I would be inclined to go under. The reason for that is that the repo rates is stayed in the 12, 14, 16 [bps] area depending on the whether you're in government or other repo and so that's why it would tend to go under."
He explained, "In terms of the overall situation that Bill addressed, what's going on in Washington and what's happening on the regulations with money funds. Well first of all, a couple of points. Money funds were not the cause of the crash in 08. In fact, the cause of the crash in '08 could easily be said to have been a crack up in the asset back commercial paper market in '07, which money funds came through quite smartly.... To me, money market funds are more like that beautiful yellow canary singing. And the canary sings as long as there's good fresh oxygen."
Donahue also commented, "This business should be about competence, not about capital and not about insurance. In terms of the regulations coming from the SEC, here is the deal there. It requires 3 votes ... in order to get a rule proposal on the floor, and then, after commentary, to a rule proposal actually passed. We don't think the poor policies being discussed now are going to get 3 votes precisely because it is poor policy. Bill mentioned the three [possible proposal options] -- a variable NAV, capital and restrictions on redemptions... To me, they're like 3 different types of poison."
He added, "First, they kill or seriously injure a 40-year old great business that maybe committed one minor sin, 99 cents on one fund, over all that time -- $345 trillion successfully moving through money funds, $500 billion of higher pay to investors than they would have gotten in bank accounts. Next, what would happen if any of those go into effect? A lot of money would move over to the bigger banks ... a lot of disruption, a lot of higher cost for issuers, and an increase in systematic risk. Remember, the whole idea of Dodd-Frank was to eliminate 'too-big to fail'. And here is a system the effect of which would be to make the banks even too bigger to fail. Some of the money wouldn't go to banks. It would go somewhere else, probably into less-regulated, less-transparent vehicles, which I don't think is the goal of regulators."
Finally, the Federated CEO stated, "Then there was a question that Senator Schumer asked of the Chairman of the Fed last week, 'What are the risks to the economy and our financial system if we were to fundamentally alter the nature of a money market fund?' Nowhere is there a discussion of studies or a direct answer to the question, but the Chairman concludes by saying, 'But, you know, Europe doesn't have any money market funds, and they have a financial system. There are many ways of structuring your financial system. But again I envision that money market mutual funds will be a part of the future of the U.S. financial system.' The point here is that there have been no studies of the unintended consequences.... These things are working well, and we don't believe any more is necessary." Look for excerpts from the Q&A section of the call in coming days (if we have room). (Note too that Donahue is scheduled to speak at Crane's Money Fund Symposium in Pittsburgh on June 20.)
