Is there a Need for a New Cash Product?

Money funds have once again proven their mettle during the current crisis, but at some point a better mousetrap will undoubtedly come along. We wanted to wax theoretical and to solicit opinions on what might eventually succeed as a better place for investors cash. I’m of course a proponent of money market funds and don’t see anything displacing or seriously competing with them anytime soon. But eventually something could develop.

Clearly, auction-rate securities aren’t it, nor are “enhanced cash” options. Consumers have continued to park trillions in bank savings accounts, so it’s relatively clear that yield is secondary to safety and simplicity. The $1.00 price of money funds is one of the underappreciated features. Investors in “cash” clearly don’t appreciate the complexity of moving NAVs.

Could a cash ETF compete? While Bear Stearns pending Income ETF (YYY) and Lehman’s short-term Treasury ETF (SHY) may gain some support from traders seeking higher-yielding shelter than their brokerages offer, they appear to be too aggressive to seriously compete with money funds. However, a future true “money market” offering could be interesting. (We’re of course looking forward to having our Crane 100 or another Crane Index used to brand such a vehicle!) The trend of brokerages sweeping to ultra-low rate bank products has opened up a huge demand for a more competitive, market-interest product.

Internet savings banks appear to have failed too, as the mortgage crisis brings to light the ridiculous reality of the banks in the most jeopardy paying the highest rates. The FDIC will undoubtedly have to take another look at why this is allowed as the spectre of bank failures threatens. Longer-term performance too has been these vehicles drawback, as banks like ING Direct and HSBC Direct have failed to keep pace with even the median money fund’s performance over time.

As banks, brokerages and investment managers blur, though, it’s inevitable that new hyrids and structures will be developed. Years from now, one may not be able to tell the difference between a bank money market account, a money market mutual fund, or a brokerage sweep account. Consumers just want safety, liquidity and, of course, yield.

I welcome your thoughts or calls (508-439-4419) on this topic!

Municipal Bond Insurers

The forces of darkness, or the bear conspiracy, have moved on to a new target, monoline insurers like MBIA and Ambac. They argue that downgrades of these municipal bond insurers will bring hundreds of billions of dollars in losses to investors and others. Having failed to find a crack in taxable money funds, many bears seem enchanted with the idea that municipal money market funds may have exposure to an MBIA downgrade.

While we don’t know and don’t care about the longer-term municipal bond markets, we don’t think there is much of a threat to money funds. Tender-option bonds and variable-rate demand notes must have “put” features to make them short-maturity and money fund eligible, so this allows money funds a quick exit. The threat comes if a dealer is unable to make good on a mass of puts, but this hasn’t happened to date. (And much has already been “put” back.)

One comment on the issue to date from http://www.cranedata.com include: Federated Investors CEO Chis Donahue, “We don’​t expect these issues to cause any credit or liquidity problems.”

Below, we reprint our news brief: (Crane Data News 1/26/08)

Federated Sets Record Straight on Muni Money Fund Risk From Insurers. In a conference call with investors yesterday, Federated Investors discussed rumors and concerns in the marketplace over municipal debt and monoline insurers, and addressed any potential impact to money market funds. Federated Senior VP and CIO Debbie Cunningham said as of early January, “The liquidity crunch has officially ended,” citing the drop in LIBOR rates and the Fed’​s recent statement that “Strains in the money markets have eased somewhat“. She added, “Federated remains very comfortable with the issuers in all of its money funds“. Mary Jo Ochson, Senior VP and CIO of Federated’​s Tax-​Exempt Money Market Group expanded on the issues in the tax exempt marketplace, saying, “We have total confidence in the ‘​put’ process.” She explained that funds rely on the bank or broker for liquidity of variable rate demand notes (​VRDNs), not on the insurers. Regarding tender option bonds, she expressed confidence, adding, “TOBs were created by investors, not Wall Street.”