A new research paper entitled, "Shooting the Messenger: The Fed and Money Market Funds", was released recently. Written by Melanie Fein of Fein Law Offices, the abstract says, "The Securities and Exchange Commission is considering regulatory proposals that may threaten the future viability of money market funds ("MMFs"). Industry members believe the SEC is acting under pressure from the Federal Reserve Board to address Fed concerns that MMFs are "susceptible to runs," part of an unregulated "shadow banking system," and pose a "systemic threat" to the financial system. According to industry members, the Fed's narrative on MMFs distorts the facts and obscures the true sources of systemic risk in the financial system. Some in the industry believe that the Fed's attack on MMFs is intended to deflect blame for the financial crisis from itself and the regulated banking industry. Many in the industry surmise that the Fed's ultimate goal is to eliminate MMFs as competitors of banks. This paper examines the Fed's narrative on MMFs and finds it to be inaccurate and misleading in key respects. Among other things, this paper finds no basis for the view that MMFs are "susceptible to runs." It shows that the "run" that started the financial crisis was not a run on MMFs but a run on bank-sponsored commercial paper during which risk-averse investors fled to MMFs for safety. The "run" by MMF shareholders that did occur in 2008 was caused by the Fed's sudden reversal of its lender of last resort policy that ignited a massive run on the entire financial system." (Look for more excerpts in a future Crane Data "News" piece.)
