Today’s SEC Action on Money Market Funds Too Little, Too Late; FSOC Must Act to Protect Taxpayers
“After the September 2008 collapse of Lehman Brothers, millions of panicked investors immediately cashed out their investments in money market funds, which lit the fuse that ignited the run on the wholesale funding markets and threatened to collapse the entire financial system. To stop that, an immediate government bailout of the $3.7 trillion money market mutual fund industry was required. It was the largest single government bailout of the financial crisis,” said Dennis Kelleher, President and CEO of Better Markets, a nonprofit organization that promotes the public interest in the financial markets.
“Almost five years later, little has changed and money market funds continue to pose a very serious risk to the stability of the U.S. financial system. The fundamental problem is that money market funds are little more than demand deposits in banks but without bank-paid-for FDIC insurance, which is what stopped runs at FDIC insured banks. Money market funds get the benefit of de facto insurance, but without having to pay for it because the government will bail them out in times of a crisis. The only way to protect taxpayers from another multi-trillion dollar bailout of the money market fund industry in the future is comprehensive reform. Unfortunately, today’s action by the SEC is incremental and incomplete. It will do little to remove the risk of runs in the next crisis,” said Mr. Kelleher.
“Limiting reform to certain prime money market funds and to a floating net asset value (NAV) will just cause money to be moved to other funds, which will become equally unstable and pose the same risks. As to the liquidity fee, it should be mandated and increased. A 2 percent fee is simply too small. It will not be effective and it ignores what happened in the most recent crisis. When a financial crisis and collapse is looming, 2 percent is meaningless as fear infects the markets, a run starts, feeds on itself and everyone races to liquidate. Contagion, a downward spiral, and a big, taxpayer-backed bailout just like last time, will be the inevitable result,” Mr. Kelleher continued.
“The only way to prevent that is a combination of comprehensive floating NAVs, a meaningful liquidity fee and gate, and a capital buffer. Without all of these measures applied broadly, there will be the false comfort that comes from the illusion of reform, without the reality of reform, which will undoubtedly materialize in the next crisis,” Mr. Kelleher said.
“The Financial Stability Oversight Council (FSOC) was created for just this circumstance, as its recent action prodding the SEC to take today’s action demonstrated. However, in light of the weak, incomplete and ineffective reforms proposed by the SEC today, the FSOC must now take more direct action to eliminate the threat posed by money market funds to the financial stability of the United States. It must expand the rule to all money market funds and require floating NAVs, capital buffers and minimum capital at risk requirements,” Mr. Kelleher concluded.
Better Markets is an independent, nonprofit, nonpartisan organization that promotes the public interest in financial reform in the domestic and global capital and commodity markets. Better Markets advocates for transparency, oversight and accountability with the goal of a stronger, safer financial system that is less prone to crisis and failure thereby eliminating or minimizing the need for more taxpayer funded bailouts.