dollar bills


So SEC Chairman Mary Shapiro wants money market funds to use mark-to-market accounting, and publish a daily NAV.  Well, why not impose mark-to-market accounting on banks, and force them to report the fair market value of their surplus every day? Large depositors over the guaranty limit and the repo market might be interested in this data.  Oh wait, that’s procyclical, so many claim, even though it reveals cash flow mismatches, which are material to the running of a banking business.

There’s a lot of hypocrisy involved in the SEC’s proposals on money market funds.

  • Banks are a larger problem.  When money market funds fail, the losses are a couple percent on NAV, versus much larger on banks.
  • Having a balance sheet enables a bank to postpone the day of reckoning; there are more games to play.
  • Some banks run “money market funds” that are essentially savings accounts, but do not have identified pools of assets behind them.  In an insolvency, a holder of such is a general creditor after FDIC coverage.
  • Money market funds cost consumers a lot less than banks in order to provide transactional services.  In one sense, money market funds deserve to exist far more than banks — they have a very low asset liability mismatch, asset quality is very high, and they exist to pass through interest earnings on a short-term portfolio.

Money market funds should be treated like book value ETFs.  They should pass through interest net of fees, andimpose credit events should the NAV fall below 0.995. [Link to my letter to the SEC]  This is a simple, stable solution, that would not require any regulation beyond that.  It would keep money market fund losses small, end deliver them to holders, not taxpayers. (Even indirectly, by borrowing from the Fed.)

So there are 300+ cases where the sponsors of money market funds put up money or offered loans where money market funds were about to break the buck.  Where Mary Shapiro sees weakness, I see strength.  Isn’t it great that financial organizations, without being required to do so by regulation, kick in their own funds or liquidity in order to preserve the interests of savers? Most banks could never do the same when they are about to go bust.

Money market funds are a way of avoiding the high expenses of banks, and offer savers a decent rate of return.  If there are losses, holders of the money market fund should bear it through a reduction in units, as described in my proposal, unless sponsors generously want to preserve their franchise.

Consumers get a better deal with money market funds.  Those that are in the pocket of the banks argue against money market funds.  I do not ever want the  government to bail out money market funds, and the US Government erred greatly when they did so in 2008.  Those holding money market funds should have borne their small losses.  There would have been little risk from letting money market funds deliver losses to holders.

Those losses were not the cause of the crisis, but the banks with their bad residential mortgage loans.  That was the crisis, and continues to be so, with so many mortgages underwater.

David Merkel, CFA of Aleph Blog