With my experience in insurance there are yet two additional ways to fix money market funds under stress.
- You can do a distribution in kind, where one withdrawing under stress gets pro-rata the securities held by the money market fund. Then they can figure out what to do with the securities that are under stress.
- You could send the money market fund into windout — taking the fund cash flows pro-rata, and sending the cash to clients as they emerge.
Though I think my earlier thoughts on how to fix money market funds are better that current proposals, these ideas will still work well.
I would recommend doing either of the above two strategies if there is a significant credit event, and there was a demand for withdrawals at par. These strategies would eliminate the fund, unlike my earlier strategy, but would hand over the the remaining assets equitably, which could be reinvested in other money market funds. And again, with my strategies, there is no need for bailouts.
Personally, if those managing money market funds were smart, they would go for my original proposal, because it allows them to manage the assets for best returns, but with no risk that they could lose their franchise, or suffer having to hold capital or have an openly disclosed NAV.
I think of my original proposal as the best compromise position for the SEC & money market funds. No one will be perfectly happy with it, but that is the sign of good laws — they split the difference.
By David Merkel, CFA of Aleph Blog
