Money-market funds have long been one of the world’s most popular investment products, and why not? For 40 years, they offered better returns than bank deposits, were just as accessible and seemed just as safe. That illusion came to an end in September 2008, when Reserve Primary Fund, the oldest U.S. money-market fund, collapsed. A debilitating run on other money funds ensued, threatening chaos for the banks and big corporations that relied on short-term loans from the funds to pay their day-to-day bills. Five years later, officials and fund companies in the U.S. and Europe are still quarreling about how to make the funds as safe as the public thinks they are — and how to build a firewall between the funds and the rest of the economy in case they aren’t.
In June 2013, the U.S. Securities and Exchange Commission put forward a plan that focused on one of the industry’s most hallowed traditions: pegging the price of a fund share at a constant $1, a sign of stability the industry thinks is key to reassuring customers. Under the SEC proposal, that would still be allowed for funds aimed at individuals or investing only in government-backed debt. But funds that cater to institutional investors or buy corporate debt would have to let their share price float to reflect the actual value of their holdings. The idea is to make investors less likely to flee if they think a fund is wobbling. Regulators proposed the exemption for retail funds because small investors didn’t flee money funds during the 2008 crisis. As a second safeguard against runs, the plan would allow funds to limit or penalize withdrawals at times of stress. But tougher measures that had been proposed in Europe or in an earlier SEC plan are off the table.
Money market funds were born in 1971 as an alternative to bank deposits, whose interest rates were capped by the government. But the crisis of 2008 focused regulators on the funds’ role as the largest source of the short-term corporate loans known as commercial paper that are used for day-to-day credit by most big companies. Only a federal bailout that put taxpayers on the hook for trillions of dollars saved the funds, and the broader credit markets. It was to stamp out this systemic risk that Mary Schapiro, the SEC chairwoman in 2012, proposed mandating a floating share price for all money-market funds, along with capital buffers to absorb losses. Schapiro was forced to shelve the plan when a Democratic commissioner joined two Republicans in opposing it after intensive lobbying by the industry. The issue didn’t die. The officials who had put together the 2008 bailout, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke, warned that a new intra-agency panel they led would pursue its own remedies if the SEC failed to act. That led to the June SEC proposal, which the new chairwoman, Mary Jo White, has supported with minor changes.
The industry argued that Schapiro’s plan was unnecessary because smaller changes required by the SEC in 2010 had already addressed safety issues. And a floating share price or withdrawal limits, they said, would drive away customers. Some fund companies, notably Charles Schwab, have signed on to the new proposal, although it’s opposed by companies including Fidelity Investments and Federated Investors. Sheila Bair, the former FDIC chairman and another crisis veteran, agrees with critics who say the new plan doesn’t go far enough. They see the $1-a-share price as an invitation to a run because “breaking the buck” is seen as so dire an event that investors may rush for the door at the first sign of trouble. That would leave those who stay put — most likely small investors — to absorb the losses. European regulators have echoed Schapiro’s ideas, and her warnings.
The Reference Shelf
- While Schapiro was preparing her plan, the Investment Company Institute addressed the question, “Do Money Markets Pose Systemic Risk?”
- After the Schapiro plan died in August 2012, the Financial Stability Oversight Council prepared its own recommendations for money-market fund reform.
- In December 2012, the SEC staff delivered this report to the three commissioners who had voted against the Schapiro plan.
- The June 2013 proposal drew more than 1,000 public comments.