The Fed's rescue of MM's - too fast? mistake?
Rescue Plan for Funds Will Come at a Cost
Excerpt:
But the guarantee plan also drew immediate attack from the American Bankers Association, whose members compete with the money fund industry. The A.B.A.’s leaders warned that the plan could encourage investors to withdraw money from an already stressed banking system to seek higher yields in money funds while the guarantee is in place.
Another important element of the plan was the Federal Reserve’s decision to expand an emergency lending program so that commercial banks could buy asset-backed securities from money funds. That step immediately began to ease industry fears that money funds would not be able to find buyers if they needed to sell assets to meet withdrawals.
“If the markets are operating as they should, it would be my hope and expectation that the temporary guarantee plan would never be needed,” Mr. Stevens added.
Charles Schwab, founder of that giant fund family, called the government’s steps “the right medicine at the right time.” The intervention was essential, he added, to “give the financial system time to re-establish its equilibrium.”
Money market funds are essentially mutual funds that invest in short-term government securities, certificates of deposit, asset-backed commercial paper and other highly liquid securities.
Since their inception, the funds have typically maintained a price of a dollar a share, providing investors with a way to earn interest on their savings without risking the loss of their principal.
That unofficial dollar floor, while not guaranteed by any prospectus or regulation, had become an article of faith among money fund investors, big and small, who all assumed that each dollar invested in a money fund would always retain its full value.
Institutional investors began to question that premise on Tuesday, after the Reserve Fund, the company whose founder invented the money fund concept in the early 1970s, announced that several of its funds had broken the buck.
The decline — only the second time a money fund had ever broken the buck — came after the funds wrote down the value of their stake in various securities issued by Lehman Brothers, which filed for bankruptcy on Monday.
Industry figures released Thursday afternoon showed that those professional investors had pulled more than $173 billion out of money funds in the previous week.
By then, it was clear that more money funds would break the buck unless withdrawals could be reduced and the market for short-term securities could be stabilized. That led to the plan announced by the Treasury and the Fed on Friday.
Taken together, the steps represent the most sweeping intervention of banking regulators into the mutual fund industry since its inception in the 1930s.
“I’ve never seen anything like it in my 57 years in the industry,” said John C. Bogle, founder of the Vanguard fund family.
The Treasury’s intention was to create an entity like the Federal Deposit Insurance Corporation, which charges banks premiums to participate in a fund that insures their customers’ deposits.
Like many steps the government has taken in this turbulent week, the guarantee plan smudges the lines along traditional regulatory borders, giving banking industry regulators an expanded and uncertain role in the mutual fund industry, which has been the purview of the Securities and Exchange Commission for more than 60 years.
One price of rescue, therefore, may be that money funds face new restrictions on the kinds of assets they can buy if they participate in the program, said Jay G. Baris, a fund industry lawyer with Kramer Levin Naftalis & Frankel in New York. That could reduce their yields at the same time that the plan’s premiums increase their operating expenses.
And dealing with an expanded universe of regulators will also be more expensive and less predictable for mutual funds, noted Geoffrey Bobroff, a fund industry consultant.
But the primary concern, Mr. Bogle said, was the risk that a federal safety net would encourage money funds to take greater risks than they should so that they can offer consumers higher yields than their rivals.
Comment: Seems like a lot of these decisions are being made very fast with little public scrutiny.
