The Die Is Cast: Government Support of Money Funds

We’ve been discussing the fact that the Treasury Guarantee Program for money market mutual funds and the Federal Reserve’s extensive support of the money markets, including the AMLF, CPFF, MMIFF, etc., clearly indicates that money market mutual funds are too big to fail. But only recently have some others begun thinking about the implications of these explicit, and implicit, guarantees. We’ve said for weeks, whether these guarantees are extended or not, the die has been cast. The government will have no choice but to step in to support the money markets should the “1,000 year flood” we just experience return at some point.

In our Crane Data News from May 28 (”CCMR Report Supports ICI Recommendations, Government Guarantees” at http://www.cranedata.com/news/#item-2310), we quote, “The Committee on Capital Markets Regulation, an “independent and nonpartisan 501(​c)(​3) research organization dedicated to improving the regulation of U.​S. capital markets” that counts a number of mutual fund industry heavyweights among its members, recently released a report entitled, “The Global Financial Crisis: A Plan for Regulatory Reform. This report incudes a brief section that weighs in on the issue of changes in money market mutual fund regulations. The CCMR Report supports the ICI’​s recent recommendations, but also appears to come out in favor of continuing a system of government guarantees for money funds.”

The CCMR Report is the first mention (outside Crane Data conversations) to discuss the implied nature of the government’s support of money markets and money market mutual funds. While we believe that the Treasury’s Guarantee Program will terminate in September, we’re pretty confident that the Treasury cannot afford to allow another money fund to “break the buck” at any point in the near future.

We’d love to hear more on this topic and would be happy to discuss in more detail off-line.

Crane Seeks Money Fund Investor Feedback

I’m seeking individual investors and institutional investors to interview them on their thoughts regarding the future of money market funds. The Investment Company Institute, the trade group representing mutual funds, and various regulators and other parties have proposed a series of improvements and suggestions, but the investor has yet to be heard.

Is the $1.00 share price important? Would you sacrifice yield for safety? Are you familiar with the current set of money fund regulations, or could fund companies do a better job of educating their investors? Are you interested in monitoring portfolio holdings?

If you’re interested, contact me (Pete Crane, pete@cranedata.us). I would love to schedule an interview and hear your thoughts. Or please feel free to post on this blog!

Attempting to Standardize “Money Market Fund” Worldwide

There has been talk recently about changing the regulations governing U.S. money market mutual funds in the United States, the mother of all money market mutual fund marketplaces with 63% of the worldwide $5.4 trillion in money fund assets. What some fail to appreciate, however, is how much better U.S. money market funds fared than every single one of their “cash” counterparts, particularly when compared to Europe’s cash offerings.

Bank savings, reserve accounts, enhanced cash, ultra-short, auction rate … everything got savaged. Though U.S. money funds had a number of bailouts and one “breaking of the buck”, the total amount of damage was significantly less severe than practically every other locale and sector. The money fund regulations truly proved their mettle.

What became painfully clear during the Subprime Liquidity Crisis, however, is the threat of contagion. When Reserve Fund broke the buck, it brought into question every similar institutional money fund. Many forget that money market funds originally came under duress due to problems in “enhanced” funds in Europe, specifically BNP and AXA Libor Plus.

Additional concerns over “enhanced cash” funds, such as Columbia Strategic Cash, GE Enhanced Cash, Florida’s Local Government Investment Pool, etc., made it painfully clear that even in the U.S. the regulatory line dividing “money market funds” from other vehicles needed to be strengthened, not removed.

Europe in particular needs a Rule 2a-7, and it’s looking increasingly likely, primarily due to the fact that many who objected to the strict definition of “money market fund” are no longer around to protest.

Doom and Gloomers Seize on False $550 Billion Number

A video click circulating on a number of blogs discusses Representative Paul Kanjorsky’s (D-Pa.) assertion that $550 billion was taken out of “money market accounts” in an “hour or two” on Thursday, Sept. 18, 2008. While the situation was dangerous, we believe that the major facts in this account are false and confused.

See Rush Limbaugh’s blog ( http://www.rushlimbaugh.com/home/daily/site_021009/content/01125106.guest.html), The Market Oracle (http://www.marketoracle.co.uk/Article8805.html), and The Zero Hour (http://www.forexhound.com/article.cfm?articleID=125182). They source the Zero Hedge in a post entitled “How The World Almost Came To An End At 2PM On September 18.”

They quote Kanjorski, “On Thursday at about 11 o’clock in the morning the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States, to the tune of $550 billion was being drawn out in a matter of an hour or two. On Thursday at about 11 o’clock in the morning the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States, to the tune of $550 billion was being drawn out in a matter of an hour or two.”

There are a host of errors in the segment referenced above. First, $550 billion in a matter of hours is ridiculous. While money market mutual funds (not “money market accounts”) were seeing tremendous redemption pressure, the amount totalled at most half that over the entire week (not hours). Money market accounts, which are presumably bank money market deposit accounts (Kanjorski later cites a $250K FDIC limit increase), likely only saw modest outflows. (Retail money market mutual funds saw only modest declines during the week, so money market deposit accounts likely only saw modest redemptions.)

Saying the drawdown would have grown to $5 trillion is ridiculous. Bank savings and money market deposit accounts only amount to $4.0 trillion in total, and money market mutual funds totaled $3.6 trillion at the time. While the situation was certainly dire and unprecedented, somebody is confusing an awful lot of facts and numbers.

To read the account of events while it happened, visit our News archives at  http://www.cranedata.com.

Feedback on the Future

I’d like to encourage any interested parties to submit comments and preferences on whether any changes should be made to money market funds. Regulators, managers and investors are now debating the future shape of money funds, so we’d like to hear some other people’s opinions before fully weighing in with our recommendations.

Though we believe that money funds have performed well during the past year-and-a-half’s mayhem, we recognize that some may demand that something be done. Our goal is to minimize the harm that any changes may bring, and to attempt to further protect both investors and fund managers with any new regulations.

Feel free to post here, or to e-mail me at pete@cranedata.us. I’d be happy to discuss, and to pass your opinions along.

Sincerely,

Pete Crane

President

http://www.cranedata.com

Fed Should Invest in Money Funds, Not CP

This thought is from my partner Shaun, “The Federal Reserve’s plan to invest directly in commercial paper has a salutary effect in the short run, providing liquidity to this important market. Longer term, however, the government may be undercutting the money market funds. The risk is that the government will dominate the market for the best paper, in the same way that Fannie and Freddie came to dominate the prime mortgage market. Prime money market funds will be pushed into buying riskier credits. A better way to support both money market funds and the commerical paper market would be to put money directly into prime money market funds. Why set up a parelell system, when we already have a very effective system to provide liquidity to commercial paper issuers?”

We welcome any thoughts as to what might be done to help the money markets!

Brokerages Wimp Out Again Caving to Auction-Rate Extortion

Once again, a state attorney general with nothing to do whatsoever with the issue has stepped in to demand millions in “penalties” for supposed crimes by large financial institutions. Of course, everyone now believes the “little guy” was deceived and cooerced into buying higher-yielding but sold-as-money-market auction rate securities. It’s embassassing….

The thought that any of these investors didn’t know they were taking more risk than they would be in a money market mutual fund is ridiculous. Money market mutual funds, though no retail investor has ever lost money, go to extraordinary lengths to make sure that anyone coming within a mile of them knows they can lose money. If money fund investors all know they could theoretically lose money, wouldn’t auction-rate securities buyers too?

Once again, we’re left with millions upon millions of legal costs and regulatory paranoia costs piled upon financial institutions, and the small investors that did the right thing — ignored the higher yields and stayed safe — will be left paying the tab. Meanwhile the greedy investors that stretched for yield are left laughing.

So we get another modern regulatory lesson. Don’t work hard and play by the rules. Go greedy, because your state attorney general will make sure you, they, and the trial lawyers, get another fat payday compliments of the Everyman.

Money Funds Step Up Communications With Conference Calls, E-​mails

Since the Subprime Liquidity Crisis began almost a year ago in the money markets, mutual fund companies have been steadily increasing their already substantial disclosure and communications with investors. We’re now seeing another wave of communications with several firms launching one-off or quarterly conference calls, some adding weekly e-mail updates, and all increasing their output of information in general.

DB Advisors is hosting a conference call entitled, “Quarterly Liquidity Management Webcast Series: Today’s Money Market Environment and the Importance of Transparency,” where Kevin Bannerton and Joe Benevento are giving an “update on developments in the short-term fixed income markets and discuss the recent challenges.” Like many, the call is open to institutional investors only.) The call should also mention Deutsche’s recent initiative with Clearwater Analytics (see Crane Data’s May 15, 2008 News “DB Advisors, Clearwater Going Live With Fund Transparency Initiative”) to provide “money fund transparency”.

Federated Investors has also announced that it will host another “Institutional Money Market Update” and will provide these “updates on a quarterly basis throughout 2008″. Subtitled “Pursuing stability, liquidity and relative safety in turbulent markets,” the July 30 call is also open only to institutional investors. Federated and CIO Debbie Cunningham have been in the forefront of the open communications movement, hosting conference calls, speaking with media, and posting numerous articles and updates on their website.

Reserve is sending e-mail alerts and hosting confercence calls “to reassure investors” who are asking, “Is my money fund safe?” “Real basic stuff,” MD Eric Lansky tells us. Dreyfus have also been hosting regular client conference calls. Oppenheimer Funds recently announced a “Weekly Dose” PDF e-mail update with yields, assets, and a portfolio composition breakout. HSBC too has been sending frequent economic and market updates to investors. Also, Goldman Sachs recently posted an update on Fannie and Freddie.

The increase in communications of course corresponds to the heightened level of scrutiny in the “cash” sector following a wave of fund support actions and following troubles with enhanced cash, auction rate securities, and now bank deposits. With new questions over Fannie Mae, Freddie Mac, and now regional bank holdings, money funds now know the drill. They’re disclosing holdings more frequently, telling investors why their current investments are still safe, and discussing steps they’re taking, and have taken, to assure investors that their $1.00 is still $1.00.

No Regulatory Changes Needed; Stuff Happens

There is now lots of talk about changing money fund regulations, changing regulatory regimes, and “doing something.” We’re of the opinion that Rule 2a-7 and money funds performed quite well in the recent turmoil and that “stuff happens”. Nobody is to blame for the subprime debacle, other than perhaps some hedge funds and bears that may have started the whole mess with false rumors of money funds “breaking the buck”.

See our discussion of the SEC’s proposals on NRSRO’s at http://www.cranedata.us/news/. We look forward to a lively debate over whether changes are needed.

People News in the Money Fund Business

A year ago, people getting laid of or even changing jobs in large numbers almost never happened in the money market mutual fund business. Now, however, it seems there are new departures, and arrivals, almost daily. (See Crane Data’s “People” News page at: http://www.cranedata.com/news/people/.) We’re starting to get requests for job openings and information, so I wanted to open up a blog discussion that might be helpful to those in transition.

While large losses, even when only on paper, usually call for people’s heads, it’s normally not a fair or rational process. Companies that urged their managers on and approved every transaction and credit, now turn around and act as if they had no idea.

I argue that, with money market mutual funds, nobody is to blame. No one did anything wrong. Even the highest-octane SIV or extendible commercial paper was perfectly safe. Only a thousand year storm could threaten these securities, and it’s silly to protect against such low odds. Better to self-insure and pick up the pieces than to become so conservative as to remove risk-taking entirely.

Anyway, please feel free to post, or let me know if you’re a job seeker. I’d also be happy to put up positions open and positions wanted news and requests on the site (http://www.cranedata.com) and in Money Fund Intelligence. Best of luck to those on the market!