Last week and earlier this week, we've been citing comments from the Investment Company Institute's recent Mutual Funds and Investment Management Conference in Phoenix. ICI's Jane Heinrichs moderated a panel which included: Robert Plaze, Deputy Director, Division of Investment Management, SEC, Paul Atkins, CEO, Patomak Global Partners, Stephen Keen, Counsel, Reed Smith LLP, Simon Mendelson, Global Co-Head, Cash and Securities Lending, BlackRock Financial Management, and Lloyd Wennlund, Executive Vice President and Managing Director, Northern Trust Global Investors. We excerpt more comments from our transcription of the panel below.
BlackRock's Mendelson, when asked about the last round of Money Fund Reforms, commented, "We were largely, as a firm, supportive of the [2010] amendments. For a lot of the players, and this was true for us too, so much of it was reconfirming a lot of the practices that we had always embraced. We always held excess liquidity; we always managed our own liquidity limits. So again, other than the technical compliance issues, it didn't change that much. The environment is different now. We spend a lot more time thinking about Sovereigns. We spend a lot more time thinking about headline risk, in terms of names in the funds. But it hasn't changed that dramatically in terms of the day-to-day."
Keen noted, "The other interesting thing to me was the slide that showed the excess 7- and 1-day liquidity well over the limits, clearly not just there as a compliance buffer ... but it was a conscious decision to maintain more liquidity. Frankly, but for the managers maintaining lots of liquidity going into September '08, there wouldn't have been $300 or almost $400 billion to pay out to shareholders. The funds have always been best and safest because the managers are always looking out for risk and taking appropriate steps to stop it. One of the ways you test that is to see that most people are behaving beyond the requirements of the rule.... It's a validation of that practice."
Atkins intoned, "I really take exception to the appellation of [the term] 'shadow banking system'. If anything the money market mutual fund system is not operating in the shadows, it is operating as the securities markets ... out in the open. We are not taking bank-type risks. All of the paper, of course, is very short versus a banking model of highly leveraged and way far out, unmatched obligations as far as risks and maturities and all that. It's operating in the open without the distortions of deposit insurance and too big to fail.... So, I think if anything, the "shadowy" banking system is the one that we ought to argue against, which is the banking system itself. If anything the money market mutual system is an alternative market model. I think that it is powerful and has [extensive] protections in place."
Mendelson explained later, "We spent a bunch of time talking to clients about their reaction to floating NAV and we sat them down and we stipulated with them, "We get that you don't like this. We get that money markets for you are the 'killer app'. Let's imagine it's gone now and now you're really forced to deal with this floating NAV thing." We pushed them hard. We did not try to induce any outcome. What was clear in the conversations is that a good chunk of the clients would simply run screaming from the room. It's not a model that they could get used to. But there is a group that if you really explain to them how little a floating NAV floats.... What we found is that it would be $10.00 90% of the days, and plus or minus a penny over 99% of the time. We could get some people to relax about it."
Plaze explained, "The question now becomes not so much [one of] capital to absorb all this losses, but rather a buffer that would replace the 50 basis point, essentially regulatory forbearance today, with some real assets. I'm not going to tell you how much there; it is too early. I expect the current staff thinking now is to be indifferent as to how that capital is raised, which provides significant, sufficient exemptive relief so that each fund group can address this in what best fits its business model, which may change over time.... That would be a real funded source from which to absorb at least small losses.... We are talking about a relatively small amount, which is made stronger and provide a greater cushion with the holdback, liquidity restriction that we will talk about a little bit latter."
When asked whether Government funds would be exempt, he answered, "It is very hard now to define what is a prime fund and what is a government fund.... There is some discussion and thought that a better approach, suggested I think by Fidelity, that would do a more of a risk-based approach, says on the basis of daily liquid assets or non-daily liquid assets.... Where it also deals with some of the issues Steve raised in his presentation what happens if you don't meet capital requirements.... Let's say if you couldn't meet the capital requirements then we can limit [investments] to daily liquid assets or even liquid assets.... That allows for a yield capital that transition to a period of time which yield top off the capitals gets that to departments."
Finally, when asked if the FSOC will act if the SEC doesn't, Atkins responded, "I say "Make my day." Ultimately, Dodd-Frank has a lot of problems. It was a poorly drafted statute.... With respect to the Financial Stability Oversight Council, it is extremely problematic. It's 10 folks gazing into their crystal balls seeing when the next bubble might come up and prick it before it happens. Of course one person's bubble is another person's livelihood. We are seeing that play out here in respect money fund mutual funds. First questions is do they have the political will to do it? The second is do they have the statutory authority and even more constitutional authority to do it? ... I guarantee if they do act, there will be lawsuits.... I dont think it will pass muster ultimately.... It doesn't look like the Chairman of the SEC has the votes, but we will see how it turns out."
