Not sure what Larry Fink is doing here but I giggled.

BlackRock Money Market Funds Refuse to Lose Value

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Basically the worst thing that can happen to you in this life is: You put $10,000 into a money market fund, but then later find out that you only have $9,999. I mean, that's not really the worst thing. Really you just lost a dollar. It's not that big a deal! You'll get through this!

But money market funds are weirdly emotional territory. There are things that are "investments," some of which are riskier than others but all of which can go up or down in value. Then there are other things called "cash," which are just cash: They can never go up or down in value, though they might pay interest. Shares in money market funds are supposed to be cash, but are actually investments, and the category confusion leads to lots of really intense reactions. This summer the Securities and Exchange Commission announced some mild new "floating net asset value" rules, requiring some money market funds to tell investors when their shares lose a little bit of value. In response, the money market industry build actual barricades in the streets and stormed the SEC's offices with pitchforks and torches, it was pretty weird.

That floating NAV fight was mostly about defaults: If your money market fund invests your $10,000 in short-dated debt of financial companies, and one of those companies is Lehman Brothers, and Lehman doesn't pay back its debts, and your fund now only has $9,950 of your money, then you should totally panic and freak out and bring down the global financial system, that's just common sense. But it turns out there are other, stranger ways for money market funds to lose money, too. There can be mark-to-market losses driven by credit (people think debts won't be paid back), or by interest rates (rates go up, so prices of short-but-not-that-short-dated debt go down, since prices and yields move inversely don'tcha know).

Or short-term risk-free interest rates can be negative, is also a thing that can happen. Not that often, but, for instance, now: The European Central Bank's deposit rate is negative 20 basis points, and short-dated government instruments from places such as Germany and France and the Netherlands have negative interest rates. So if you are a money market fund focused on European government instruments, and you invest $10,000 in those instruments, you're gonna end up with $9,999, maybe less. (And that's even before you pay your own fees and expenses!) This is a deep existential problem.

BlackRock has found a very wonderful solution. Its ICS Europe Government Liquidity Fund may be buying European government bonds in an environment where cash tomorrow is worth less than cash today, but that doesn't mean that an investment in the fund has to lose money. Investments in the fund will retain their full value. There'll just be fewer of them:

Blackrock wrote to investors giving 14 days notice of its intention to switch on the Reverse Distribution Mechanism for the ICS Europe Government Liquidity Fund, the New York-based firm said in an e-mailed statement today.

See, the way it normally works is, if you have $10,000 in a money market fund, you have 10,000 shares each worth $1. When the fund pays interest, it does it by distributing shares: You had 10,000 shares, it paid 0.1 percent interest, now you have 10,010 shares each worth $1.

BlackRock's innovation is: When the fund pays negative interest, it does it by distributing negative shares. You had 10,000 shares, it paid negative 0.1 percent interest, now you have 9,990 shares each worth $1. But your shares never lost value. Some of them just disappeared is all. It's a reverse distribution.

It's a little loony, but you have to remember the context; everything in money market funds is a little loony:

“To most people, whether you have 100 shares at 99 cents or 99 shares at a dollar doesn’t matter, but in money fund land, it raises the specter of breaking the buck -- anything that implies that you’re losing money becomes a big deal,” Peter Crane, president of money-market researcher Crane Data LLC, said in an interview. “They would much rather find a way to keep the value of the shares stable and yet to cover those negative yields.”

I don't really know what to make of this. I mean, there's the "hahaha why are you paying BlackRock money to hold on to your money" dimension, but that is not a particularly interesting dimension. Your money is useful to you and you need to keep it somewhere; the reverse distribution mechanism is probably more efficient than the "take out a bunch of banknotes and keep them in safes in all of your offices" alternative.

But the mechanism! It is a delight, is it not? The weird thing is that no one thought to apply it to the floating NAV debate. From the objections to the SEC's proposals, you'd have thought that the prospect of a money market fund losing value is the greatest threat facing the global financial system. But BlackRock solved the problem! Your shares never have to decline in value. They can just decline in number. That's completely different, and much better.

  1. To be fair, this is not just about corporate treasurers' emotions. Lots of money market fund investors have board mandates, investment charters, etc., that limit them to stable-value investments, and a fund that can lose money may not qualify. Similarly there are tax consequences to investing your cash in a thing with a value that can fluctuate. The idea of a money market fund is that it's supposed to substitute well for cash, not just psychologically but operationally; the floating NAV makes that harder.

  2. One euro, probably, but why change currencies this far into the post?

  3. The mechanics are on pages 73-74 here, but they're no more complicated than that really.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Toby Harshaw at tharshaw@bloomberg.net