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If into conspiracy, ya might think they're trying to kill off money market funds with the publicity & ensuing restrictions. (That would make banks very happy BTW) Ramifications: (1) Returns on money market funds will likely fall. I know - DUH. However, under more normal conditions, they typically pay higher interest than banks do on deposits - with only a modicum more risk. (2) Restricting liquidity goes to the heart of what many own these for - moving in and out of riskier investments. Now, imagine a morning when some domestic or overseas event is causing stocks to tank. You decide to liquidate a money fund at TRP or wherever to buy a fund on your watch list you've been looking to own at an attractive entry price. But, you can't sell 100% of your money fund because law requires a certain % of your assets be withheld for a set period. The fund house may have its own minimum balance requirements on the fund, making matters even more muddled. (3) One alternative investors might use to ward off that senereo would be to shift money fund assets into short term bond or GNMAs. They're not as stable, but at least you'll have 100% available should you need it. (Just what we need - more $$ flowing into bond funds ...:-) (4) Fund houses would face some tough decisions. Some likely will join an existing trend and simply shut down in house money funds. Another possibility would be to re-brand money funds under the badge of "ultra-short" - if they can sneak that past the regulators. Presently, some fund houses allow pretty much unlimited exchanges in and out of money funds. I would hope - should this regulation take effect - that privilege would be afforded holders of short term bond funds or the like. Seat-belts in cars were a great idea. However, installing them on money market funds - like boats - might not be so cool.
How quickly people forget. In 2008, many money market funds were at the brink of breaking the buck if the the 'big' government had not come to rescue. Next time, if such a thing does not happen, your so-called safe fund will break it and it will be frozen for months like the reserve funds. Good luck. There is no such thing as safe and high return in this type of funds. These funds are no savings accounts and should not behave like that. There are no reserves like FDIC insured accounts have. For liquidity there should be FDIC insured checking accounts linked to brokerage accounts for those that need absolute safety.
"When Lehman collapsed in September 2008, it triggered losses in a money-market fund called Reserve Primary, which held Lehman debt. When investors learned that the fund had "broken the buck" by falling under the $1 per share value it sought to maintain, investors fled Reserve Primary and other funds. The panic eased only after the U.S. government and Federal Reserve vowed to backstop the funds."
"I understand why very few in the industry support changing the current structure," Ms. Schapiro said. "At the end of the day, the taxpayer simply can't be on the hook for failure, and the tools to ameliorate a run that existed in 2008 when Reserve broke the buck don't exist anymore."
As usual, all of us (me included) want to have our cake and eat it too.
Reply to @Old_Joe: "As usual, all of us (me included) want to have our cake and eat it too."
Yeah, this is the problem. If the current structure is preserved each time monies moved into the fund the investor should be forced to acknowledge that if the fund ever breaks the buck, they may not get the full amount of their investment back and redemptions could be suspended for extended periods and that these are not FDIC insured and has no government backing or guarantee.. Than if the fund breaks the buck, they would have nobody but themselves to blame.
Such warnings exists in the prospectus but people do not understand.
Or, perhaps they should be forced to pay for insurance. The principle that are under the insurance limit they have purchased would be made while and the rest would be subject to what could be recovered in case the fund breaks the buck. If they pay for extra insurance, perhaps they would be aware of the risks.
Fidelity complaining about the proposals? Weren't they the ones proposing insurance in the first place?
Fidelity Investments has asked the Securities and Exchange Commission for permission to set up an affiliated insurance company to guarantee its money market mutual funds against certain losses of up to $100 million.
Not being able to get all your money on demand? Anyone read the rules for a bank's savings or money market account?
In order to classify an account as a "savings deposit", the institution must in its account agreement with the customer reserve the right at any time to require seven days' advance written notice of an intended withdrawal.
Reply to @Investor & OJ: I'm OK with loosing $$ in these things or any other type of mutual fund. That's part of the game. In any case, the '08 fiasco was pretty atypical. Can recall seeing grown adults crying cause half their 401Ks had been wiped out In a few months. If people can't accept the risks inherent in money market funds, than put it in federally insured bank accounts. But, I still remember in the 80s making 15 - 20% interest in these things and to me the risk was worth it. (Banks hated it.) So, OK, educate folks and make sure they know the risks. But keep govt paws outa how our MFs are run. Where next? Gonna make GNMAs safe for investors? How about junk bond funds? Let's pass some regs so ya can't loose money in equity funds!
Hi there Hank- No, I can see what you're saying too. The main problem, at least as I understand it, really isn't the individual depositors/investors losing some part of their money. The thing is that the great majority of the money in these funds doesn't just sit around waiting for someone to ask for it back. No, it's used for short-term financing in many parts of the overall commercial, industrial and financial industry... loans to a huge spectrum of business customers who depend upon this source being constantly available for short-term roll-over paper. If this financing source suddenly freezes without warning, many very bad things follow in a very short period of time.
So the issue seems to be really another manifestation of the "too-big-to-fail" syndrome. Reserve Primary did stupid things, the "average investor" (ie "ignorant investor") didn't wait around to see if it was a localized problem- they saw the possibility of losing their "safe" money, we got a classic "run on the bank", and came very close to precipitating a totally unnecessary national financial panic/shutdown. You know how interrelated all of this major financing apparatus is.
If the MM funds were simply loaning this money to the gov't and taking gov't paper as security, then the gov't could use the usual smoke and mirrors to take care of the problem. But if for example all of a sudden the auto financing industry, or the credit-card industry (or maybe both) gets shut down without any advance warning (and how the hell would they know about stupid stuff happening at some mutual fund?), who can possibly control what happens next?
I dunno- maybe we need two types of MM funds- one that's insured, with obviously a lower payout but you get your money when you want it, no questions asked, and one that isn't- a better payout but you take your chances with maybe not being able to grab all of your money when you want it, if something unusual is going on in the financial sector.
Hi OJ - I hear what you're saying. Maybe more truth in advertising needed? If loosing a nickel or dime on the dollar scares *#%+#! out of somebody, they shouldn't be in these - although that would be an extreme case. These funds have always held ultra short high grade paper - with considerable government restrictions already on what they can hold. In past average maturity didn't exceed 90 days. Even shorter now. A few shaved corners for better returns - but were generally known. Money funds didn't cause the havoc of '08. However, they became one of the few areas government could shore up to keep things from getting even worse.
A lesson is provided in "It's a Wonderful life" with James Stewart. Remember when there's a bank run and Stewart has to explain that folks' $$ ain't just sitting at the bank? It's been loaned out for farms, homes and such. Well, if not for the FDIC guarantee, banks wouldn't be any safer now. With money funds you know up front there ain't any guarantee. With banks? I take that guarantee with a grain of salt.
You're on to something with that last suggestion. Guess it's just big brother lumping all of these together and applying restrictions across the board that bothers me. You're gonna see a stampede out if this plan goes through - and don't think that will benefit anyone - except possibly the banks.
Comments
"When Lehman collapsed in September 2008, it triggered losses in a money-market fund called Reserve Primary, which held Lehman debt. When investors learned that the fund had "broken the buck" by falling under the $1 per share value it sought to maintain, investors fled Reserve Primary and other funds. The panic eased only after the U.S. government and Federal Reserve vowed to backstop the funds."
"I understand why very few in the industry support changing the current structure," Ms. Schapiro said. "At the end of the day, the taxpayer simply can't be on the hook for failure, and the tools to ameliorate a run that existed in 2008 when Reserve broke the buck don't exist anymore."
As usual, all of us (me included) want to have our cake and eat it too.
Yeah, this is the problem. If the current structure is preserved each time monies moved into the fund the investor should be forced to acknowledge that if the fund ever breaks the buck, they may not get the full amount of their investment back and redemptions could be suspended for extended periods and that these are not FDIC insured and has no government backing or guarantee.. Than if the fund breaks the buck, they would have nobody but themselves to blame.
Such warnings exists in the prospectus but people do not understand.
Or, perhaps they should be forced to pay for insurance. The principle that are under the insurance limit they have purchased would be made while and the rest would be subject to what could be recovered in case the fund breaks the buck. If they pay for extra insurance, perhaps they would be aware of the risks.
Fidelity complaining about the proposals? Weren't they the ones proposing insurance in the first place? NYTimes August 16, 1996
Not being able to get all your money on demand? Anyone read the rules for a bank's savings or money market account? Regulation D.
You're right - people don't read the rules and warnings, else they'd realize they've already agreed to stuff similar to this.
So the issue seems to be really another manifestation of the "too-big-to-fail" syndrome. Reserve Primary did stupid things, the "average investor" (ie "ignorant investor") didn't wait around to see if it was a localized problem- they saw the possibility of losing their "safe" money, we got a classic "run on the bank", and came very close to precipitating a totally unnecessary national financial panic/shutdown. You know how interrelated all of this major financing apparatus is.
If the MM funds were simply loaning this money to the gov't and taking gov't paper as security, then the gov't could use the usual smoke and mirrors to take care of the problem. But if for example all of a sudden the auto financing industry, or the credit-card industry (or maybe both) gets shut down without any advance warning (and how the hell would they know about stupid stuff happening at some mutual fund?), who can possibly control what happens next?
I dunno- maybe we need two types of MM funds- one that's insured, with obviously a lower payout but you get your money when you want it, no questions asked, and one that isn't- a better payout but you take your chances with maybe not being able to grab all of your money when you want it, if something unusual is going on in the financial sector.
As usual, no easy answers to any of this stuff...
A lesson is provided in "It's a Wonderful life" with James Stewart. Remember when there's a bank run and Stewart has to explain that folks' $$ ain't just sitting at the bank? It's been loaned out for farms, homes and such. Well, if not for the FDIC guarantee, banks wouldn't be any safer now. With money funds you know up front there ain't any guarantee. With banks? I take that guarantee with a grain of salt.
You're on to something with that last suggestion. Guess it's just big brother lumping all of these together and applying restrictions across the board that bothers me. You're gonna see a stampede out if this plan goes through - and don't think that will benefit anyone - except possibly the banks.