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!

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.”

Money Fund Insurance on the Comeback?

Years ago, Fidelity pioneered the concept of insurance for money market mutual funds. While it didn’t cover the whole $1.00 NAV, it was designed to cover “isolated defaults” or bolts from the blue. The insurance was launched around 1998, but was discontinued following the 9/11 attacks and following the default of Pacific Gas & Electric — events which caused insurance premiums to skyrocket.

Some money funds may still have these “isolated default” or even NAV protection policies in place, but most undoubtedly followed Fidelity’s lead in letting their policies lapse. In the past, Federated, Vanguard, USAA and UBS were among those with these insurance policies.

Given recent events, we’re seeing a renewed interest in the possibility of protecting the advisors, or I mean the investors, from any of these liquidity seizure events. As we’ve seen in the past, it’s almost always “money good”. The only challenge is riding out the panic wave and holding until cooler heads prevail.

I’d love to hear any thoughts or questions, and am currently researching this topic to possibly do a more extensive article in upcoming January issue of our Money Fund Intelligence.

Blogs Discover Enhanced Cash and Money Funds

Below, I mention some recent blog postings involving money funds and/or enhanced cash. While most are typical Chicken Little fare, or merely link to their favorite Bloomberg or WSJ scare article (quilty as charged here too!;-), there are some sane and thoughtful nuggets out there (don’t look for them in the replies posted though!).

Finaxyz’s “Finance and Economics Commentary” posts “Enhanced cash funds vs. money market funds” at: http://finaxyz.blogspot.com/2007/12/enhanced-cash-funds-vs-money-market.html. Jack Krupansky says, “Sometimes people ignorantly or misguidedly or even intentionally suggest that enhanced cash funds are the same as money market funds and that money market funds may have the same problems, but it simply isn’t true.”

The Market Oracle, one of the most popular doomsayers, writes “Academics at the Fed Have No Real Money Markets Experience – US In Stagflation” at: http://www.marketoracle.co.uk/Article3094.html. (They must be friends with Charlie Gasparino and Herb Greenberg, they like the phrase “Break the buck” so much! Too bad they don’t know what it means — they’re talking about enhanced cash….)

Accrued Interest writes “Money Markets: And I thought they smelled bad… On the outside!” at: http://accruedint.blogspot.com/2007/12/money-markets-and-i-thought-they.html. (A little dated, but representative of the madness out there.)

The Politics of Debt blog posts “Things That Go Bump in the Night”, which reprints a newsletter from John Mauldin (a favorite with the “Doomies”): http://thepoliticsofdebt.com/?p=262.

I’d love to see some people who know what’s going on in the money markets post replies, but it doesn’t seem to do much good with this crowd…. Thanks to Google’s Blog search and to the X-Files — “The Truth is Out There!”;-). Happy Holidays to All!

Bring Sanity to Bloggers on Money Fund Issues

I’d like to call on anyone who is able and familiar with issue surrounding money funds to check some blogs and try and bring sanity to some of these doomsayers. The Wall Street Journal’s MarketBeat Blog Discusses “When $1 Is Not Worth $1″, by David Gaffen (http://blogs.wsj.com/marketbeat/2007/11/15/when-1-is-not-worth-1/#comment-13890). While this isn’t the “world-is-ending” tone of most, the follow up posts are leaning that way. Please help join me in telling the world that money fund investors will be okay, that losses in SIVs will be minimal and manageable, and that investors are fine sticking with funds!

Thanks!
PeteC