Daily Links Archives: July, 2011

Reuters TV interviewed Peter Crane and Debbie Cunningham in a story entitled, "Redemptions accelerate in money market funds." Also, Federated Investors released its 2nd Quarter 2011 earnings late yesterday and hosts a conference call at 9am Friday morning. The release says, "Federated Investors, Inc., one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.41 for the quarter ended June 30, 2011 compared to $0.46 for the same quarter last year. Net income was $42.4 million for Q2 2011 compared to $47.7 million for Q2 2010.... Money market assets in both funds and separate accounts were $265.7 billion at June 30, 2011, up $5.2 billion or 2 percent from $260.5 billion at June 30, 2010 and down $5.4 billion or 2 percent from $271.1 billion at March 31, 2011. Money market mutual fund assets were $236.1 billion at June 30, 2011, up $4.9 billion or 2 percent from $231.2 billion at June 30, 2010 and down $2.9 billion or 1 percent from $239.0 billion at March 31, 2011.... Compared to the prior quarter, revenue decreased by $13.1 million or 5 percent. The decrease in revenue primarily related to the aforementioned increase in fee waivers and lower average money market assets."

Investment News writes "The buck stops fear? Treasury-wary advisers should consider cash". It says, "As the Washington debt limit spectacle grinds on, financial advisers might want to consider their options with regard to cash management if for no other reason than peace of mind. Granted, in the event of a full-blown default by the U.S. Treasury, "we are all in a world of hurt," according to Eric Lansky, director at StoneCastle Partners LLC, a cash management firm. However, with a full-scale default seen as a remote scenario, Mr. Lansky said investors could be protected from a more plausible short-term default or downgrade of U.S. debt by seeking the shelter of Federal Deposit Insurance Corp.-backed cash investments." The article also quotes Peter Crane, president and chief executive of Crane Data LLC, "Default [by the U.S. government] is a threat to money funds and the entire banking system.... Without the backing of the U.S. Treasury [in the event of a full scale default], the FDIC insurance fund would last about 45 minutes. FDIC insurance calms people's nerves because they assume there's a government guarantee behind it, but I don't think anyone would get all warm and fuzzy about FDIC if it weren't backed by the Treasury." See also yesterday's Wall Street Journal piece "Money Funds Dial Down Risk".

Bloomberg writes "Money Funds' Risk Rises Over Debt Cap Debate". The article says, "The impasse in Washington over raising the federal debt ceiling has exposed U.S. money-market mutual fund clients to increased danger, according to Moody's Investors Service." Moody's statement says, "Direct risks include the potential for a missed interest or principal payment on government bonds for a short period of time, as well as incremental weakening of the overall credit quality of money-market fund portfolios that have U.S. government exposure." The Bloomberg piece continues, "Money-market funds rated Aaa by Moody's are 'largely resilient to the direct impacts' of a downgrade of the U.S. rating to Aa1, the company said. A debt downgrade to Aa2 or worse 'could negatively impact the ratings of a large number of funds,' according to Moody's.... `Vanguard Group Inc. hasn't made any major changes because of the debt-ceiling debate, said David Glocke, who oversees about $163 billion in money-fund assets at the Valley Forge, Pennsylvania-based firm." It quotes Glocke, "We've been adding to Treasury holdings because, as concerns over Europe have evolved, we've reallocated out of Europe and into other sectors of the market." Bloomberg adds, "Glocke said that while he didn't believe a downgrade would significantly affect the pricing of Treasuries, the U.S. government's failure to repay bondholders or make interest payments would be disruptive."

"U.S. Money Fund Exposure to European Banks Declines Moderately" says a report from Fitch Ratings. The release states Fitch "has just published a report, U.S. Money Fund Exposure to European Banks Declines Moderately, which updates (as of June 30) its analysis of the exposure of U.S. prime money market funds to European banks. The study, based on a sample of the 10 largest prime money market funds (MMFs), reveals that: European bank exposure on a dollar basis dropped by 8.7%, while total MMF assets in the sample decreased 7.5%; French exposure declined roughly in line with the overall decline in European exposure; and, U.K. dollar exposure remained essentially flat, but increased as a percentage of the funds' assets." See also, FT's "Money market funds cut euro bank exposure", which says, "US money market funds have sharply cut their exposure to banks in the eurozone over the past few weeks and reduced the availability of credit, even in stronger countries such as France. The money market funds, historically crucial providers of short term financing to European banks, have withdrawn from all but extremely short-term lending as concerns about sovereign debt have mounted."

Federal Reserve Chairman Ben Bernanke's Testimony on Dodd-Frank last week (July 21) included the comment, "Reducing the likelihood of a severe financial crisis also requires strengthening the resilience of our financial markets and infrastructure -- a third major objective of the Dodd-Frank Act. Toward that end, provisions of the act improve the transparency and stability of the over-the-counter derivatives markets and strengthen the oversight of financial market utilities and other critical parts of our financial infrastructure. We and our colleagues at the Securities and Exchange Commission, the Commodity Futures Trading Commission, and other agencies are moving this work forward, in consultation as appropriate with foreign regulators and international bodies. The U.S. agencies are also working together to address structural weaknesses in areas not specifically addressed by the Dodd-Frank Act, such as the triparty repo market and the money market mutual fund industry. To be sure, any sweeping reform comes with costs and uncertainties. In implementing the statute, the Federal Reserve is committed to the promulgation of rules that are economically sensible, appropriately weigh costs and benefits, protect smaller community institutions, and, most important, promote the sound extension of credit in the service of economic growth and development. A full transition to the new system will require much more work by both the public and private sectors, and no doubt we will learn lessons along the way. However, as we work together to implement financial reform, we must not lose sight of the reason that we began this process: ensuring that events like those of 2008 and 2009 are not repeated. Our long-term economic health requires that we do everything possible to achieve that goal."

ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $24.74 billion to $2.672 trillion for the week ended Wednesday, July 20, the Investment Company Institute reported today. Taxable government funds decreased by $8.80 billion, taxable non-government funds decreased by $15.76 billion, and tax-exempt funds decreased by $180 million. Assets of retail money market funds increased by $3.53 billion to $918.95 billion. Taxable government money market fund assets in the retail category increased by $2.15 billion to $179.23 billion, taxable non-government money market fund assets increased by $1.42 billion to $543.14 billion, and tax-exempt fund assets decreased by $40 million to $196.58 billion.... Assets of institutional money market funds decreased by $28.27 billion to $1.753 trillion. Among institutional funds, taxable government money market fund assets decreased by $10.95 billion to $646.71 billion, taxable non-government money market fund assets decreased by $17.18 billion to $999.84 billion, and tax-exempt fund assets decreased by $140 million to $106.09 billion." See also, Bloomberg's "Money Market Fund Safeguards Elude Dodd-Frank Regulators: One Year Later".

The Federal Reserve Bank of New York's Liberty Street Blog writes "Stabilizing the Tri-Party Repo Market by Eliminating the 'Unwind'". It says, "On July 6, 2011, the Task Force on Tri-Party Repo Infrastructure -- an industry group sponsored by the New York Fed -- released a Progress Report in which it reaffirmed the goal of eliminating the wholesale 'unwind' of repos (and the requisite extension of more than a trillion dollars of intraday credit by repo clearing banks), but acknowledged unspecified delays in achieving that goal. The 'unwind' is the settlement of repos that currently takes place each morning and replaces credit from investors with credit from the clearing banks. As I explain in this post, by postponing settlement until the afternoon and thereby linking the settlement of new and maturing repos, the proposed new settlement approach could help stabilize the tri-party repo market by eliminating the incentive for investors to withdraw funds from a dealer simply because they believe other investors will do the same. In effect, eliminating the unwind can reduce the risk of the equivalent of bank runs in the repo market, or 'repo runs.' A repurchase agreement is a sale of securities coupled with an agreement to repurchase the securities at a specified price at a later date. In the United States, a tri-party repo is a form of repurchase agreement in which a third party, the clearing bank, intermediates between the cash investor and the collateral provider. A detailed description of the tri-party repo market can be found in the working paper 'The Tri-Party Repo Market before the 2010 Reforms.'"

"IMA to monitor Money Market fund holdings" writes U.K.'s Citywire. It says, "The [London-based] Investment Management Association will for the first time monitor the portfolio holdings of funds within the Money Market sector from the start of January next year. The move comes after the IMA announced it will adopt the new definition of money market funds outlined by the European Securities and Markets Authority, with effect from July 1 this year. Although the Financial Services Authority has said it requires the IMA's Money Market sector to comply with the European regulator's model, the exact definition of these funds has not yet been finalised and the IMA is still in discussion with its members. Due to this transition, the IMA will monitor the portfolio holdings of funds within the Money Market sector.... In April, Standard Life pulled out of the [U.K.] Money Markets sector, due to mounting regulation.... The FSA has also issued a policy statement on its consultation to introduce ESMA's guidelines on a common definition for European Money Market funds into the Collective Investment Schemes Sourcebook."

The Financial Stability Oversight Council yesterday released its Final Rule on "Authority to Designate Financial Market Utilities as Systemically Important" and it released a report on "Secured Creditor Haircuts." While we're still reading (and mystified by) the former (and we see no mention of money market funds), the latter explains, "On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Two of the goals of the Dodd-Frank Act are to promote market discipline and taxpayer protection. Section 215 of the Dodd-Frank Act calls on the Financial Stability Oversight Council to study whether allowing regulators in a resolution proceeding to treat a portion of fully secured creditors' claims as unsecured would promote these objectives. While section 215 contemplates evaluating secured creditor haircuts in the utilization of the orderly liquidation authority authorized by Title II of the Dodd-Frank Act, OLA provides no authority to impose secured creditor haircuts. Proponents of secured creditor haircuts believe secured creditor haircuts would be an effective means of promoting market discipline and taxpayer protection. They argue that secured creditor haircuts would: (a) cause secured creditors to engage in more extensive credit analysis and monitoring, thereby limiting the ability of the largest, most interconnected financial firms to pose a risk to U.S. financial stability; (b) promote taxpayer protection by giving the United States priority over a portion of the secured claims of other creditors; and (c) reduce collateral demands on distressed firms and discourage secured creditors from taking value-destroying actions that would force borrowers into failure. Others have questioned the efficacy of secured creditor haircuts in promoting market discipline and taxpayer protection, and have argued that secured creditor haircuts may have significant drawbacks."

A press release says, "The U.S. Department of the Treasury today announced that the next Financial Stability Oversight Council (FSOC) meeting will be held Monday, July 18th in Treasury's Cash Room. There will be both a closed and an open session. The open session will be focused on the one-year anniversary of the Dodd-Frank Act. The FSOC also held a closed meeting on Wednesday, July 13th to review and prepare materials for the open meeting next week. Who: Members of the Financial Stability Oversight Council, When: 11:00 AM EST, Monday, July 18, 2011, Where: U.S. Department of the Treasury Cash Room, 1500 Pennsylvania Avenue, NW, Washington, DC. This event is open to the press, and will be streamed live from the Department of Treasury's website at LINK. In the open session, the FSOC will consider the following items: 1. 2011 FSOC Annual Report, 2. Final Rule on Authority to Designate Financial Market Utilities as Systemically Important, 3. Secured Creditor Haircut Study pursuant to section 215 (b) of the Dodd-Frank Act, 4. Minutes of the July 13, 2011 FSOC meeting, and, 5. Minutes of the May 24, 2011 FSOC meeting."

The latest weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $9.69 billion to $2.696 trillion for the week ended Wednesday, July 13, the Investment Company Institute reported today. Taxable government funds increased by $14.69 billion, taxable non-government funds decreased by $810 million, and tax-exempt funds decreased by $4.19 billion." ICI's weekly adds, "Assets of retail money market funds decreased by $5.12 billion to $915.43 billion. Taxable government money market fund assets in the retail category decreased by $220 million to $177.08 billion, taxable non-government money market fund assets decreased by $3.11 billion to $541.73 billion, and tax-exempt fund assets decreased by $1.79 billion to $196.62 billion.... Assets of institutional money market funds increased by $14.80 billion to $1.781 trillion. Among institutional funds, taxable government money market fund assets increased by $14.91 billion to $657.67 billion, taxable non-government money market fund assets increased by $2.29 billion to $1.017 trillion, and tax-exempt fund assets decreased by $2.40 billion to $106.22 billion." Crane Data's Money Fund Intelligence Daily shows total money fund assets have risen by $16.4 billion in July month-to-date (through 7/14) vs. a decline of $43.9 billion in June. Prime money funds, which rose by $2.6 billion yesterday, have been flat in July following a drop of $81.7 billion in June.

A press release entitled, "BlackRock to Report Second Quarter 2011 Earnings on July 20th" sent out last week says, BlackRock, Inc. "announced that it will report results for the second quarter of 2011 prior to the opening of the New York Stock Exchange on Wednesday, July 20, 2011. Chairman and Chief Executive Officer, Laurence D. Fink, and Chief Financial Officer, Ann Marie Petach, will host a teleconference call for investors and analysts at 9:00 a.m. (Eastern Time). BlackRock's second quarter earnings release will be available in the investor relations section of the Company's website, www.blackrock.com, before the teleconference call begins." Federated Investors' "will report financial and operating results for the quarter ended June 30, 2011 after the market closes on Thursday, July 28, 2011. A conference call for investors and analysts will be held at 9 a.m. Eastern on Friday, July 29, 2011. President and CEO J. Christopher Donahue and CFO Thomas R. Donahue will host the call. Investors interested in listening to the teleconference should dial 877-407-0782 (domestic) or 201-689-8567 (international) or visit FederatedInvestors.com for real-time Internet access."

FSOC to Meet

Jul 13 11

A press release sent out yesterday says, "The U.S. Department of the Treasury today announced that the next Financial Stability Oversight Council (FSOC) meeting will be held Monday, July 18th in Treasury's Cash Room. There will be both a closed and an open session. The open session will be focused on the one-year anniversary of the Dodd-Frank Act. The FSOC also will be holding a closed meeting on Wednesday, July 13th to review and prepare materials for the open meeting next week. The open session agenda will be released in the days ahead. WHO: Members of the Financial Stability Oversight Council, WHEN: 11:30 AM EST, Monday, July 18, 2011, WHERE: U.S. Department of the Treasury, Cash Room, 1500 Pennsylvania Ave., N.W., Washington, DC."

We just stumbled across Federated's June 28 Letter to the Editor of the Wall Street Journal. Chief Legal Officer John McGonigle writes, "It looks like the Wall Street Journal in Monday's editorial 'Money-Market Mayhem' got it exactly wrong -- again. It was dismaying to see an editorial in one of nation's most important business news periodicals misinterpreting the use of high quality European-bank debt in money market funds.... The Journal generally looks to markets as an indicator of reality in order to discern truth from media hyperbole. In this case, the editorial fails to note that the market has not penalized European-bank debt used by money market funds. In fact, rates reflect the market's agreement about their minimal credit risk and have barely moved even as the media invokes the curious spectacle of a European-bank debt boogey man threatening money market funds. The editorial went on to repeat the canard that money funds survive on some kind of implicit taxpayer guarantee. In point of fact, shares of money market funds are not guaranteed by the government or their sponsors, and the cover of every prospectus says so. Shareholders of the Reserve Primary Fund did not receive government support. It is true that during the recent financial crisis, investors, including money market funds and debt issuers, benefitted from government intervention designed to stabilize short-term debt markets that had largely ceased to operate. That intervention, rather than costing taxpayers, made money for the Treasury. We believe that systemic reforms implemented since the crisis and the recent amendment to the regulations governing money market funds will obviate the need for similar action by the government in future crises. The simple fact is money market funds are an example of regulatory success. They are a good deal for shareholders, the capital markets, and taxpayers. Perhaps the better course for those who continue to question the efficacy of the reforms already initiated would be to step back and watch how these highly resilient and successful products continue to thrive and deliver value to shareholders, taxpayers and the capital markets."

The Sunday Los Angeles Times writes "Money market funds stand out for their meager returns". It says, "The debt crisis in Greece has stoked worries about money funds' safety, but the lack of a decent return is the biggest problem for most investors. Money market mutual funds long have been the utility players of the investment world -- reliable but boring, and usually garnering attention only when they drop the ball. Lately, money funds have been making the blooper reels a lot. In an era of low-yielding investments, money funds stand out for their meager returns. The average fund currently yields 0.04% annually, or a paltry $4 a year on a $10,000 investment." The piece quotes Peter Crane, head of money fund researcher Crane Data in Westboro, Mass., "Money funds would have no problem whatsoever from a Greek default. The thought that there was ever any threat to money market mutual funds was, quite frankly, ridiculous." The article adds, "Even so, the SEC, federal lawmakers and the fund industry are debating the need for additional measures. One idea is to let fund values "float" above or below $1 depending on the value of the underlying securities. Proponents say that could limit the risk of a run on the bank, but opponents say it could raise unnecessary fears." Crane adds, "The only two things we know for certain is that there will be additional changes, and no one knows what those changes will be."

The LA Times writes "Money market fund cash outflows ease after rising on Europe debt fears". It says, "Cash outflows from money market mutual funds slowed this week, suggesting a lessening of investors' concerns over the funds holdings of European bank debt. Overall, a net $9.9 billion came out of the funds in the seven days ended Tuesday, or about 0.4% of total assets of $2.66 trillion, according to data firm iMoneyNet Inc. The net outflow was $18 billion the previous week and $27.5 billion the week before that. As Europe's government debt crisis has worsened over the last month, investors began to focus on money funds' major holdings in short-term debt and certificates of deposit from European banks." Also, `ICI reported their weekly "Money Market Mutual Fund Assets" report, which says, "Total money market mutual fund assets increased by $3.93 billion to $2.687 trillion for the week ended Wednesday, July 6, the Investment Company Institute reported today. Taxable government funds increased by $11.89 billion, taxable non-government funds decreased by $13.02 billion, and tax-exempt funds increased by $5.06 billion." (Crane Data's Money Fund Intelligence Daily shows inflows into Prime money funds over the past two days.)

Robert Pozen writes "Wading into money-market funds? Risk-return trade-off makes getting wet worth it" in The Washington Post. He says, "Breaking-the-buck" has "happened only twice in the 40-plus-year history of money-market funds.... No one wants a third fund to break the buck, so regulators are considering changes to the rules that govern money-market funds to further reduce their risk. They're looking at two types of proposals: moving to a floating share price (no longer stable at $1 per share) or requiring that funds hold a cushion against losses. Either of these could well hobble money-market funds to the point where they are no longer attractive to investors or borrowers. A floating share price would make money-market funds less attractive to conservative investors who want to earn interest on short-term cash without risking losses. At the same time, requiring funds to hold some sort of a cushion against losses would increase the cost of managing them.... Rather than implementing a floating share price or establishing a loss cushion, money-market funds should change the way they handle large redemptions by institutional investors -- redemptions that played a major role in the only two instances when a fund broke the buck.... It's critical for both investors and bond issuers that money-market funds remain a viable alternative to banks.... Yes, money-market funds have a modest degree of risk, but their advantages offset it. And remember that, in the worst case on record, when the Reserve Primary Fund broke the buck in 2008, shareholders lost only 3 cents on every dollar. Not bad for the most severe financial crisis since the Great Depression."

Federated's Debbie Cunningham writes in the company's latest "Month in Cash", "We concur with the Fed's view that the deceleration in the rate of economic expansion will prove temporary and that another recession is not on the horizon.... Bernanke's recent assertion that 'monetary policy cannot be a panacea' for all that ails the U.S. economy implies that the Fed believes it has done what it can to promote growth and is anxious to normalize monetary policy as conditions warrant.... However, given the Fed's overarching desire to avoid a repeat of Japan's disastrous experience with deflation, benchmark interest rates probably will not begin moving higher for another two or three FOMC meetings.... Given what we perceive to be a dearth of value across the cash curve, we are focusing new purchases on short-term securities, which carry less interest rate risk and also provide the liquidity necessary to lock in higher yields as they appear. Of course, we are carefully monitoring the events in Greece given modest positions in some of the European banks that hold at least some Greek government bonds on their balance sheets. Our analysis indicates that Federated's exposure of those large financial institutions is limited, manageable and represents no meaningful threat to the banks themselves or to our holdings. As always, we will remain vigilant to these and other issues which potentially might impact the pools, whose creditworthiness remains our highest priority." See also, Reuters' "U.S. money funds diverge on European bank paper" and Dow Jones' "Greece Jitters Spark Hefty June Redemptions From US Money-Market Funds".

"SEC Division of Investment Management Names Robert Plaze as Deputy Director and Diane Blizzard as Managing Executive" says a release put out Friday. It comments, "The Securities and Exchange Commission today announced that Robert E. Plaze has been named Deputy Director in the Division of Investment Management and Diane C. Blizzard has been named Managing Executive of the Division. As Deputy Director, Mr. Plaze will play an integral role in the Division's regulatory program under the Investment Company and Investment Advisers Acts of 1940. This includes rulemaking, granting orders exempting entities from requirements of the Acts, and issuing interpretive positions under the Acts. Mr. Plaze has been a member of the Division staff for more than 27 years. He has served in a number of positions, most recently as Associate Director for Regulatory Policy. Mr. Plaze has led numerous regulatory policy and rulemaking initiatives, and has engaged extensively with other financial regulators on behalf of the Commission on important and timely projects related to investment advisers and investment companies." Eileen Rominger, Director of the SEC's Division of Investment Management, says, "I'm very pleased that we will have the benefit of Bob's great experience and talent deployed across a broader scope of the Division's work. In his new role, Bob will help me and other leaders in the Division appropriately prioritize our near-term regulatory agenda and longer-term initiatives, and help the Commission identify the best possible solutions to the challenging issues we face in our mission of investor protection." Mr. Plaze adds, "This is a great opportunity to work with Eileen Rominger to further investor protections and our ambitious regulatory agenda."

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ICI's latest weekly "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $16.86 billion to $2.683 trillion for the week ended Wednesday, June 29, the Investment Company Institute reported today. Taxable government funds increased by $34.63 billion, taxable non-government funds decreased by $48.30 billion, and tax-exempt funds decreased by $3.19 billion. Assets of retail money market funds decreased by $4.33 billion to $916.77 billion. Taxable government money market fund assets in the retail category increased by $2.93 billion to $174.96 billion, taxable non-government money market fund assets decreased by $5.60 billion to $546.09 billion, and tax-exempt fund assets decreased by $1.66 billion to $195.72 billion. Assets of institutional money market funds decreased by $12.53 billion to $1.766 trillion. Among institutional funds, taxable government money market fund assets increased by $31.70 billion to $633.21 billion, taxable non-government money market fund assets decreased by $42.69 billion to $1.026 trillion, and tax-exempt fund assets decreased by $1.53 billion to $106.26 billion." See also, the SEC filing for PayPal Money Market Fund, which is liquidating.