1150 Seventeenth Street, N.W., Washington, D.C. 20036
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At the height of the crisis last year, some investors fled money market mutual funds, worsening the strains in the financial system. In an effort to restore market confidence and ensure short-term liquidity, the Treasury Department intervened to guarantee these investments, and the Federal Reserve made credit available that allowed
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funds to meet heavy redemption requests and also provided short-term credit directly to borrowers in the commercial paper market. Will money funds survive without such support? If not, how should they be regulated in the future? A new report by the Investment Company Institute (ICI) proposes new liquidity and maturity standards to correct this market.
At this AEI event, ICI chief economist Brian Reid will discuss these findings. Joining Reid will be Mercer Bullard, a University of Mississippi law professor and an investment management expert; Eugene F. Maloney, executive vice president of Federated Investors, a firm that has been involved in shaping the legal landscape for money market funds; and Peter J. Wallison, who holds AEI's Arthur F. Burns Chair in Financial Policy Studies. AEI's Vincent R. Reinhart will moderate.
| 9:45 a.m. | Registration | |
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| 10:00 | Presenter: | Brian Reid, Investment Company Institute |
| 10:45 | Discussants: | Mercer Bullard, University of Mississippi School of Law |
| Eugene F. Maloney, Federated Investors | ||
| Peter J. Wallison, AEI | ||
| Moderator: | Vincent R. Reinhart, AEI | |
| 12:00 p.m. | Adjournment |
American Enterprise Institute
1150 Seventeenth Street, N.W.
Washington, DC 20036
Phone: 202-862-5852
E-mail: adam.paul@aei.org
American Enterprise Institute
1150 Seventeenth Street, N.W.
Washington, DC 20036
Phone: 202-862-4870
E-mail: VRodman@aei.org
WASHINGTON, MAY 8, 2009--When financial markets headed down last year, many investors fled to safety. At first they fled to money market mutual funds, considered so safe that they are legally considered "cash equivalent." Then, on September 16, 2008, one day after the collapse of Lehman Brothers, the money market Reserve Primary Fund became only the second in U.S. history to "break the buck" and suspend redemptions. The breakdown caused a run on the money market, and the Treasury offered to insure money market accounts opened prior to the Primary Fund collapse. The Treasury's protection ends later this year, but some believe that the bailout will have lasting consequences.
"We have permanent implied money market insurance. It's with us now and it's likely to be with us forever," Mercer Bullard of the University of Mississippi and Fund Democracy said at an AEI conference on money market funds on May 5. He noted that raising the Federal Deposit Insurance Corporation's protection to $250,000 increases government obligations to the banking sector and may in fact be riskier.
AEI's Peter J. Wallison disagreed, arguing that the Treasury program will end with little impact. "We are going to return to the status quo ante; money market funds will be seen as uninsured," he said. According to Wallison, Primary Fund problems only affected other funds because of extremely rare market conditions. Had markets been properly functioning, breaking the buck would only have harmed the mismanaged firm, not the whole sector. While the government has intervened in a number of cases, by allowing Lehman Brothers to fail the government made market participants doubt that it would act to save other failing institutions.
Concerns about increased risk in the money market, real or perceived, have some calling for new rules. Brian Reid, the chief economist for the Investment Company Institute (ICI), an industry organization, presented finding from ICI's Money Market Working Group recommending new disclosure requirements, shorter maturities, and new liquidity standards. Reid said that these provisions can be conducted by firms with expansions of the current regulatory framework and without government insurance.
The ICI report favors these solutions to alternatives like floating net asset valuations. Under current rules, money market funds are allowed to round their net asset value (NAV) to one dollar as long as it stays in a small range. When funds exit that range, they "break the buck." Under a floating NAV, the fund's value would fluctuate. Reid explained that floating NAV investments, such as ultra-short bond funds, already exist but that demand remains low.
Eugene Maloney of investment management firm Federated Investors agreed that floating NAVs and other reforms--such as capital requirements--that make money market funds more like banks should be discouraged. He counseled that "imprudent regulation" could put money market funds out of business. Maloney agreed with Wallison that the conditions that caused the Primary Fund to break the buck are extremely rare. "Money markets funds did not create the financial crisis," he said. "They were victims of it."
The ICI report concludes that the market conditions seen last year are rare. The report calls for modest improvements to existing regulations rather than a regulatory overhaul. During the discussion period following the panel, one questioner compared the Treasury's insurance to the government's relationship to Fannie Mae and Freddie Mac; the government said it would not protect these firms, but it did when they faltered. Comparing the two scenarios, Wallison, who has written extensively about the GSEs, explained that expectations matter. "Nobody knows," he said. "If we act like money market funds are protected by the government, they may in fact become backed by the government."
--ADAM PAUL
Mercer Bullard is an associate professor of law at the University of Mississippi School of Law, where he teaches courses on securities, banking, corporations, corporate finance, and law and economics. He is also the founder and president of Fund Democracy, an advocacy group for mutual fund shareholders, and a senior adviser at the financial planning firm Plancorp. Mr. Bullard has testified before House, Senate, and Departments of Labor and State committees on mutual funds, hedge funds, 529 plans, 401(k) plans, and other regulatory issues. He has written extensively on investment management issues, including a recent article on money market funds. Mr. Bullard was formerly an assistant chief counsel at the Securities and Exchange Commission. He previously clerked for a federal judge and practiced securities law in Washington, D.C., at WilmerHale (formerly Wilmer, Cutler & Pickering).
Eugene F. Maloney is executive vice president, corporate counsel, and a member of the executive committee of Federated Investors. Through Mr. Maloney’s efforts, Federated Investors is responsible for virtually all of the state legislation permitting public entities to use money market funds to manage their liquidity. Mr. Maloney has appeared as a speaker at American Bankers Association gatherings and is a frequent speaker at State Bankers Association meetings. He is an instructor in trust and securities law at Boston University School of Law, has been a visiting instructor at the Federal Financial Institutions Examination Council and the American Bankers Association’s National Graduate Trust School at Northwestern University, and participates in programs leading to the designation of certified trust and financial adviser. Mr. Maloney has also served as an expert witness in both judicial and legislative settings on matters relating to fiduciary compensation, will construction, and prudent investing.
Brian Reid is the chief economist at the Investment Company Institute (ICI), a position he has held since 2005. Mr. Reid also heads the institute’s research department. Since joining ICI in 1996, he has participated in research examining a variety of mutual fund topics, including fees and expenses, trends in the mutual fund market, and shareholder behavior. Prior to joining ICI, Mr. Reid worked as a staff economist at the Monetary Affairs Division of the Federal Reserve Board for seven years.
Vincent R. Reinhart, a resident scholar at AEI, is a former director of the Federal Reserve Board’s Division of Monetary Affairs who has spent more than two decades working on domestic and international aspects of U.S. monetary policy. He held a number of senior positions in the Divisions of Monetary Affairs and International Finance and spent the last six years of his Federal Reserve career as secretary and economist of the Federal Open Market Committee. Mr. Reinhart has worked on topics as varied as economic bubbles and the conduct of monetary policy, auctions of U.S. Treasury securities, alternative strategies for monetary policy, and the efficient communication of monetary policy decisions. Since joining AEI, Mr. Reinhart has published work on international capital flows and has commented in the press on issues including the Federal Reserve, the mortgage system, and the financial crisis.
Peter J. Wallison holds the Arthur F. Burns Chair in Financial Policy Studies at AEI, where he codirects the Institute’s program on financial market deregulation. He previously practiced banking, corporate, and financial law at Gibson, Dunn & Crutcher in Washington, D.C., and New York. From June 1981 to January 1985, Mr. Wallison was general counsel of the U.S. Treasury Department, where he had a significant role in the development of the Reagan administration’s proposals for deregulation in the financial services industry. He also served as general counsel to the Depository Institutions Deregulation Committee and participated in the Treasury Department’s efforts to deal with the debt held by less-developed countries. During 1986 and 1987, Mr. Wallison was White House counsel to President Ronald Reagan. Between 1972 and 1976, Mr. Wallison served first as special assistant to Governor Nelson A. Rockefeller and, subsequently, as counsel to Mr. Rockefeller when he was vice president of the United States.
