Following 2008’s little Lehman-induced hiccup in the industry, some folks had a radical idea: Maybe money-market funds should have to report their actual share price like everyone else, rather than the share price they aspire to. Well, that rule is still going on to the books, but you’ll have to try really hard to fall under its purview. Read more »
money market funds
I dunno, you want to get excited about the new proposed money market fund rules? You can if you want. To get a sense of the stakes involved, consider the email I got from a reader today worrying that the SEC may wind up “killing say the market for receivables conduit financing in an attempt to ensure that the precise conditions of September 2008 are never replicated.” So: fair, but also, like, farewell receivables conduit financing market, I hardly knew ye. I did not know ye at all, is what I’m trying to say.1
The new rules basically require money market funds to tell you their net asset value, instead of the current rule of not telling you their net asset value, which again is sort of a funny thing to get upset about. In the olden days you could just say your NAV was $1.00 as long as it was at least $0.995; if it fell below that you’d “break the buck” and have to freak out and have massive redemptions and forced sell-offs and so forth. Under the basis-point rounding of the new rules, you’d break the buck at below $0.99995 of NAV and I guess the idea is who has the energy to freak out there, it’s like a basis point man, whatever. Binaries create faster death spirals than continuums. The SEC says: Read more »
The Financial Stability Board is … is a thing, first of all, did you know that? It’s not the Financial Stability Oversight Council, though it is as far as I can tell a global version of that with similar composition (senior regulators! in a room!) and obsessions (shadow banking! money market funds!). It’s also not the Systemic Risk Council, which is different, insofar as it’s just a thing that Sheila Bair made up. I am going to make up a thing – the “Systemic Stability Oversight Board” seems available – and if you ask me nicely I will invite you to join it and we will make beautiful, beautiful reports together.
Like the FSB did with their report about shadow banking1 released yesterday. “Shadow banking,” like “junk bonds,” is a term that sort of assumes the panic it sets out to create, and so the report dutifully provides a number that is bigger than another number:
The shadow banking industry has grown to about $67 trillion, $6 trillion bigger than previously thought, leading global regulators to seek more oversight of financial transactions that fall outside traditional oversight. … The FSB, a global financial policy group comprised of regulators and central bankers, found that shadow banking grew by $41 trillion between 2002 and 2011.
Here is that in graphical form:
Holy crap look at that purplish line go! Oh wait that purplish line is just regular banks; shadow banks are the red line. Which also goes up. Just not as fast. If it worries you that shadow banks added $41 trillion in assets in 2002-2011, you might spare a thought for non-shadow banks adding, what, $80 trillion in assets? I submit to you that non-shadow banks have shadowy places of their own; I half-seriously submit to you that the term “shadow banking” functions to make regular banking sound less shadowy, like Disneyland in Baudrillard.2 Here it is in percentage terms: Read more »
Financial Stability Council Is Unimpressed By Money Market Funds’ Contribution To Financial StabilityBy Matt Levine
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.
Jury Finds That Guys Who Said “We intend to protect the NAV on the Primary Fund to whatever degree is required” Were Entitled To Change Their MindsBy Matt Levine
- Get people to invest their money with you and then lose it all because you’re unlucky, reckless, an idiot, an unlucky reckless idiot, etc.
And here is a thing that it is not okay to do:
- Lie to them about it.
That’s pretty much that!1 But it’s easy to lose track of the difference, especially if you or your loved ones or your financial system lost all their money through the good efforts of reckless idiots. The Journal had a whole package of like “why aren’t more reckless idiots in jail???” today, spurred mostly by the pending SEC settlement in which JPMorgan will pay a ton of money over mortgage fraud but no individual humans will be charged with having committed mortgage fraud; the mortgage fraud was, like, in the system.2 It bears pondering.
Nonetheless: the law is the law, and in its majesty has decreed that reckless idiocy = okay, lying about it = not. Where does that leave Bruce Bent Sr. and his son Bruce Bent II? BB Sr. invented money market funds, which I guess some people would say qualifies as reckless idiocy all by itself, but anyway he and BB2 ran the Reserve Primary money market fund and it invested in Lehman debt and lost a bunch of money and they were arguably not totally forthcoming about it and the SEC sued them for fraud. Today a jury more or less decided that they didn’t lie about it: Read more »
Money market mutual funds are among other things “mutual funds,” meaning that they’re piles of stuff owned by people called “shareholders.” The shareholders ultimately own the stuff, so if you put $100 into a money market fund and it invests it in stuff and the stuff loses half its value then you should only get back $50. This is what it means to be a shareholder: you have a stake in a business, here the business of sitting around looking fondly at a pile of AAA-rated short-term debt instruments, and when that business does well you share in the rewards and when it does poorly you bear the losses.
But nobody goes around thinking of themselves as “shareholders” in the venture of money-market-fundery; rather, they think of their money market funds as basically being “cash” and when they put in $100 they expect to get back $100 and also, in some historical periods rather far removed from ours, a thing that they would call “interest,” though of course “shareholders” don’t get “interest.”*
One tip that no one thinks of MMMF shareholders as shareholders is this post from John Carney about a “secretive government program to bail out money-market mutual funds,” specifically treasury’s guarantee of money market fund asset values announced in 2008, which I suppose was secretive in the narrow sense that only now and via FOIA are we learning which money market funds took advantage of it.** In the broader sense, it was not particularly secretive, as Treasury actually announced the shit out of it for the fairly obvious reason that a government guarantee cannot restore confidence in a beleaguered asset class if you do not tell anyone about it.***
Secretive or otherwise, though, it was a weird program: while you might think that the government was too solicitous or not solicitous enough of various creditors of various things during the financial crisis, this is the only place I’m aware of where shareholders in a thing were guaranteed not to lose money on their shares in that thing. But, y’know, “shareholders.” Read more »