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.
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?