Money Market Funds: Two Additional Reforms


With my experience in insurance there are yet two additional ways to fix money market funds under stress.

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  • 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.

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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

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.
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