One day somebody will write the history of arguments of the form “we should be allowed to trick people, it’s for their own good.” It sounds like a terrible argument doesn’t it? And yet. There are real points to be made against mark-to-market accounting at banks. And this Investment Company Institute paper from July arguing against floating share prices for money market funds is also sort of persuasive.1 Oh sure, telling investors that every dollar they invested in a money market fund is worth $1.00, even if it’s actually worth $0.997 or whatever, is not true. And sure letting them redeem $0.997 worth of stuff for $1.00 creates all sorts of run-on-the-bank stability problems. But it lets investors treat money market funds as cash! And think of the tax consequences and administrative headaches of a floating share price!

But those arguments are mostly losing. Re: money market funds, a while back Mary Schapiro at the SEC tried to impose rules roughly in the form of “either tell people what their shares are worth or have a capital buffer to make sure they’re worth $1.0000”; she failed to get enough votes, and now the super-SEC that is the Financial Stability Oversight Council have said “you should try that again”2:

The Financial Stability Oversight Council, a board of top U.S. regulators established by the Dodd-Frank financial overhaul, approved several recommendations to overhaul money-market funds in an open meeting Tuesday. The aim of the council’s push is to prevent runs on money-market funds during a financial crisis, as happened in 2008 when Lehman Brothers Holdings Inc. filed for bankruptcy protection.

Treasury Secretary Timothy Geithner, who is chairman of the FSOC, said at Tuesday’s meeting that he hopes the proposal will generate public comment and ultimately put pressure on the SEC to “take this back and propose on its own a set of options” for money-market overhauls.

Here are the FSOC proposals, and I guess they are bad news for money market funds because in a certain light money market funds look suspiciously like “all trick.” They transform not-especially-risky short-term financial-firm (and securitization, etc.) debt into not-at-all-risky cash, just by saying that they’ve done so.3 You take a thing worth about $0.995 to $1.005 and just say it’s worth $1.00 and that is almost the definition of narrowing the distribution and fattening the tails.

You can see why that would give the systemic-risk types the heeby-jeebies, and in fact a lot of the money-market-fund debate has the subtext of

  • Regulator: You should do these things.
  • MMFs: But those things will destroy our industry!
  • Regulator: And … ?

Perhaps surprisingly this FSOC thing isn’t quite that. For instance, the ICI worries that a floating share price will cause all sorts of tax problems because people will constantly have tiny tax gains and losses in their cash-management accounts, and the FSOC, rather than the expected “OK NO MONEY MARKET FUNDS THEN FINE” response, actually has a constructive magic wand to wave here; a neat thing about the FSOC is that they’re not the SEC but rather the super-SEC so they can do things like strongly suggest to the IRS what to do:

The Treasury Department and the IRS have indicated to the Council that they will consider the extent to which expansion or modification of basis reporting could help shareholders deal with floating-NAV MMFs. Finally, they will evaluate the possibility of some administrative relief from the wash sale rules for de minimis losses on floating-NAV MMF shares.

There’s a certain amount of this conciliatory tone, which I guess makes sense if you are trying to force through a thing that was defeated by lobbying a few months ago.

All in all though the FSOC probably has the upper hand. Part of this is down to longer-term factors: perhaps wrongly, mark to market seems to be gaining ground over “mark to a nice round number” as a general thing, and arguments about administrative inconveniences of fluctuating cash amounts get harder and harder to make as everything gets so darn administratively convenient. I mean, you have a computer, if your cash position goes up or down by three dollars every day it’s not the end of the world for you to update whatever needs to be updated. E*Trade will let you write checks against your investment account4; checking against ever-so-slightly-fluctuating money market accounts does not seem beyond the abilities of our top financial engineers.

Part of it though is the unfortunate timing of these recommendations coming the same week as the Bent verdict. The guy who invented money market funds is also the guy who invented breaking the buck, and the gist of the SEC’s fraud charges against him was that, rather than forthrightly admit “we’ve lost a bit of money” and letting investors withdraw at then-current net asset value, he instead spent precious hours kerfuffling around about how everything was fine and rounded to $1.00 and that caused people who believed him to end up having to withdraw only 98 cents on the dollar which, horror.

And the SEC lost, and you can understand why: his whole business model was taking things worth a certain amount and telling people they were worth a slightly different amount. That’s what the rules allow. So it’s hard for a jury to get too mad at him for telling people their things were worth a slightly more different amount. And if you don’t like that, as the SEC and FSOC clearly don’t, then changing the rules is a logical next move.

Financial Watchdogs Move to Rein In Money Funds [WSJ]
Proposed Recommendations Regarding Money Market Mutual Fund Reform [FSOC]

1. This other one, arguing against capital requirements for money market funds, sort of isn’t. “Charging us for risk will reduce our ability to take un-charged-for risk” is, whatever.

2. Incidentally, full marks to that Journal story for the sequence of sentences that go like “One alternative is for money funds to float their prices … The money-fund industry has opposed a floating-NAV solution … Another FSOC proposal: … a buffer of capital to absorb day-to-day fluctuations in value. Money-market funds also have opposed such a measure … The third alternative includes a capital buffer as well as other measures … The industry opposes this option as well.” Point taken!

3. And diversification I guess?

4. I think?

29 comments (hidden for your protection)
Show all comments ↓

Comments (29)

  1. Posted by I think? | November 14, 2012 at 1:28 PM

    Yesteryear's mattress is today's MMF?

  2. Posted by NSE | March 12, 2013 at 1:27 PM

    Leverage: Banks will not typically loan money to buy stocks. Banks will however, compete fiercely to loan money to buy

  3. Posted by johan addin | March 31, 2013 at 4:09 AM

    . But pure gold is very soft so it is usually mixed with other metals to make it stronger and prevent it from bending too easily

  4. Posted by 3d renderings | April 7, 2013 at 2:34 PM

    . With 3D images, budgets will be estimated and allocated better. On top of that, these 3D images can be used to impress investors on the upcoming development. 3D architectural rendering design services include interior and exterior rendering as well as house and floor plan rendering.
    architectural 3d renderings

  5. Posted by video San Diego | April 10, 2013 at 10:19 AM

    Here are 5 guidelines to making an informed decision when hiring a video production company.
    san diego and video production

  6. Posted by nyc kids photography | May 9, 2013 at 2:11 AM

    But pure gold is very soft so it is usually mixed with other metals to make it stronger and prevent it from bending too easily

  7. Posted by Joseph | May 16, 2013 at 10:53 PM

    Financial stability is one of the important aspects these days that's the reason why a lot of investors are trying hard to understand further about it.
    new york broker

  8. Posted by Kenneth Janes | May 25, 2013 at 3:44 AM

    There’s a certain amount of this conciliatory tone, which I guess makes sense if you are trying to force through a thing that was defeated by lobbying a few months ago.
    Moving Boxes delivery

  9. Posted by kulutusluotot | June 3, 2013 at 12:41 PM

    But genuine silver is very smooth so it is usually blended with other materials to create it more powerful and avoid it from flexing too quickly

  10. Posted by Premier Home | June 21, 2013 at 8:44 AM

    The guideline and information is too good, we can utilize this information and can do our work more easily……

  11. Posted by Debt Erasers | June 30, 2013 at 9:22 AM

    But genuine silver is very smooth so it is usually blended with other materials to create it more powerful and avoid it from flexing too quickly

  12. Posted by ken smith | August 4, 2013 at 12:32 AM

    The guide and details is too excellent, we can implement this details and can do our perform more quickly.
    workers comp quote florida

  13. Posted by albert | August 12, 2013 at 1:42 PM

    But pure gold is very soft so it is usually mixed with other metals to make it stronger and prevent it from bending too easily Reliable Chiropractor

  14. Posted by sandtondc | August 15, 2013 at 9:08 PM

    Its usually mixed with copper to get it down to 9ct.

  15. Posted by www.sandtondc.co.za | August 15, 2013 at 9:13 PM

    its usually mixed with copper to bring the quality down to 9ct

  16. Posted by ecn forex | August 20, 2013 at 11:45 PM

    The guide and details is too excellent, we can implement this details and can do our perform more quickly.

  17. Posted by joost fontien | September 15, 2013 at 10:38 AM

    One should go through a analysis document to understand the appropriate structure for a analysis document. To create good research paper, one should follow the actions described.

  18. Posted by john | September 30, 2013 at 12:11 AM

    WIth the fluctuation of gold, markets are just not going to be stable.

  19. Posted by payday loan | November 16, 2013 at 4:04 PM

    The information and information is too outstanding, we can apply this information and can do our execute more easily.

  20. Posted by Lg price in India | December 20, 2013 at 12:41 PM

    The aide and parts is too amazing, we can actualize this items and can do our perform all the more rapidly.

  21. Posted by 3rd party logistic | December 28, 2013 at 5:56 AM

    The information and information is too outstanding, we can apply this information and can do our execute more easily.

  22. Posted by amber | February 12, 2014 at 4:57 AM

    Yet true silver precious metal can be quite easy so it's commonly mixed up together with other materials to generate the item better and prevent the item by warming up too quickly.

  23. Posted by amber | February 13, 2014 at 3:35 AM

    There’s plenty of this particular conciliatory strengthen, i speculate adds up if you're attempting to drive by means of something ended up being overcome simply by lobbying some time ago.
    Relocating Boxes supply.

  24. Posted by amber | February 15, 2014 at 2:08 AM

    Along with animations photos, costs will likely be approximated and assigned much better. In addition, these types of animations photos may be used to win over investors for the upcoming development. animations executive rendering style services include things like interior and outdoor rendering along with residence and floor approach rendering.
    executive animations renderings.

  25. Posted by amber | February 15, 2014 at 5:43 AM

    . Having 3d images graphics, costs are going to be believed in addition to designated better. Added to that, these kinds of 3d images graphics can be used to impress investors within the approaching growth. 3d images industrial manifestation style solutions contain inner surface in addition to external surfaces manifestation in addition to property in addition to floor program manifestation.
    industrial 3d images renderings.

  26. Posted by amber | February 17, 2014 at 7:30 AM

    There’s plenty of this particular conciliatory strengthen, which i speculate is practical if you are attempting to pressure via something has been beat by means of lobbying some time ago.

  27. Posted by amber | February 17, 2014 at 7:54 AM

    . Having animations pictures, costs will probably be estimated in addition to allotted greater. In addition to that, these animations pictures enables you to impress investors about the future development. animations executive manifestation layout products and services include things like inside in addition to external surfaces manifestation along with property in addition to bottom plan manifestation.

  28. Posted by utah seo | March 30, 2014 at 5:15 PM

    Furthermore, these sorts of activitys photographs may be utilized to win over moguls for the approaching improvement. activitys official rendering style administrations incorporate things like inside and outside rendering alongside home and carpet methodology rendering. official movements renderings.

  29. Posted by entrepreneur | April 9, 2014 at 6:17 AM

    The details and details is too excellent, we can implement this details and can do our perform more quickly.