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Paulson Backs Schapiro’s Bid for SEC Rules on Money Markets

Former Treasury Secretary Henry Paulson
Former U.S. Treasury Secretary Henry Paulson. Photographer: Nelson Ching/Bloomberg

Former Treasury Secretary Henry Paulson is backing U.S. Securities and Exchange Commission Chairman Mary Schapiro’s effort to impose new rules on money-market funds.

In a letter that the SEC published May 30 on its website, Paulson highlights excerpts of his 2010 book, “On the Brink,” which provides his account of the financial crisis. Paulson’s letter covered the period between Sept. 16 and Sept. 19, 2008 when Bank of New York Mellon Corp., BlackRock Inc. and Northern Trust Corp. reported requests for “billions in redemptions” from their money funds. Such requests exacerbated a credit crisis that began earlier that month, he wrote.

Paulson, who was President George W. Bush’s Treasury Secretary from 2006 through 2009, has mostly avoided the debate over financial regulation since he left office. He encouraged Schapiro to use his letter to help bolster her argument that money-market funds should face tougher regulations.

“You should feel free to use this any way which helps you secure this important reform, including quoting from it, or sharing all or part of it with the press or members of Congress,” Paulson, a former chairman of Goldman Sachs Group Inc., wrote in the letter dated Feb. 22.

Michele Davis, a spokeswoman for Paulson, said he wrote the letter because Schapiro asked for his views on the issue.

Schapiro has warned since November that future runs on money-market firms could damage the economy, a view shared by Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke.

Chamber Opposition

She is battling a lobbying campaign funded by the U.S. Chamber of Commerce, which opposes new rules as an unnecessary burden that could weaken money-market funds.

House Financial Services Committee Chairman Spencer Bachus, an Alabama Republican, has also questioned the need for new rules. The Senate Banking Committee is expected to hold a hearing on June 21 to discuss possible rules, a person familiar with the plan said.

Since November, Schapiro has met or held telephone conversations with representatives of Vanguard Group Inc., Fidelity Investments, Charles Schwab Corp., and JPMorgan Chase & Co. to discuss money-market rules, according to the SEC’s records.

Schapiro initially proposed requiring money-market firms float their $1 net asset value along with mandating more capital and preventing customers from withdrawing all of their funds for 30 days. The so-called holdback provision has been particularly controversial in the industry and Schapiro is said to be open to replacing it with a fee that would be imposed on customers who take out their money during a liquidity crisis.

Floating NAV

Money-market firms have also fought the effort to move the industry to a floating net asset value. Paulson’s letter highlights a passage in his book that supports the floating value.

“The SEC should explore whether fund managers should move from a fixed NAV, which makes money-market funds resemble insured bank accounts, to a floating NAV,” he wrote. “The funds would still be good products and could offer attractive returns, liquidity and very low volatility and principal risk.”

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