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FYI: New rules aimed at strengthening one of America’s most popular savings products -- the money-market mutual fund -- are causing a minor tempest in financial markets, drawing complaints about unintended consequences.
Bloomberg should tell the truth. Retail prime funds are indeed affected by the new rules, as has been extensively discussed here - gating and fees on redemptions. Nor were institutional investors under any delusion about the possibility of losses in MMFs.
That said, MMFs have been deceiving people, but not in the way Bloomberg describes. Rather, many would have broken a buck, but for hidden intervention by the fund sponsors (fund families). They made cash infusions to prop up the funds. Reserve Fund failed because its sponsor was a relatively small company without the deep pockets of a Fidelity or a Vanguard to bail it out.
The Fed calls this "non-contactual support". It observes that "Such support, which has served to obscure the credit risk taken by these funds, has been a common occurrence over the history of MMMFs."
So common that Moodys identified 146 funds that were propped up prior to 2007 when all hell broke loose.
Aside from Reserve Fund, the only other fund to have broken a buck was The Community Bankers US Government Fund in 1994. What I find interesting is that this was an institutional government fund - the type of fund that the new SEC rules don't alter. Government funds are allowed to hold a constant NAV and not impose any gating or fees on redemptions.
Comments
That said, MMFs have been deceiving people, but not in the way Bloomberg describes. Rather, many would have broken a buck, but for hidden intervention by the fund sponsors (fund families). They made cash infusions to prop up the funds. Reserve Fund failed because its sponsor was a relatively small company without the deep pockets of a Fidelity or a Vanguard to bail it out.
The Fed calls this "non-contactual support". It observes that "Such support, which has served to obscure the credit risk taken by these funds, has been a common occurrence over the history of MMMFs."
So common that Moodys identified 146 funds that were propped up prior to 2007 when all hell broke loose.
Aside from Reserve Fund, the only other fund to have broken a buck was The Community Bankers US Government Fund in 1994. What I find interesting is that this was an institutional government fund - the type of fund that the new SEC rules don't alter. Government funds are allowed to hold a constant NAV and not impose any gating or fees on redemptions.