Scrutiny of money market funds continues
An unsuccessful effort to tighten rules for money-market mutual funds raises an unpleasant issue for the millions of investors who rely on the funds.
Should investors keep billions of dollars in a low-yielding investment that could be far riskier than it seems?
The head of the Securities and Exchange Commission was forced to scrap a plan to revamp the structure and inner workings of money-market mutual funds after failing to garner enough support for the plan.
SEC Chairwoman Mary L. Schapiro had argued that money-market funds are vulnerable to losses during financial panics, which could cause investors to lose money.
The risk is that funds could “break the buck,” or push their value below a dollar a share, as happened with one high-profile fund during the financial crisis in late 2008.
Unexpected losses in money-market funds would be a blow to the millions of Americans who have long relied on the funds as the virtual equivalent of bank savings accounts.
Investors may not be worried about the funds’ safety, but they have noticed their extremely low yields.
Investors have shifted $1.3 trillion into bank savings accounts since the crisis, leaving $2.6 trillion in money-market funds, according to Peter Crane, president of Crane Data, a research firm in Westboro, Mass.
“They’re much more concerned about the low yields than they are the remote risk of at some point losing a penny on the dollar,” Crane said.
Money-market funds historically have paid investors 1% to 2% more than bank savings rates. But since the financial crisis, interest rates have been at historic lows, bringing the fund yields closer in line with — if not slightly below — savings accounts rates, which are insured by the Federal Deposit Insurance Corp.
The average money-market fund yields 0.06%, whereas the average bank savings rate is about 0.1%, analysts said.
Schapiro on Wednesday canceled a vote on her proposed money-market fund rules after being unable to get three needed votes from the commission.
Schapiro and other federal regulators say the funds remain a weak link in the financial system four years after the collapse of Lehman Bros. sent financial markets — and the economy — into a free fall.
Prior to the trouble of the Primary Reserve Fund in 2008, only one other money-market fund had broken the buck from 1983 to 2008, according to the SEC. It was a small fund and had no widespread impact. The Primary Reserve Fund and other funds faced widespread investor panic, forcing the U.S. Treasury to guarantee accounts.
As with other types of mutual funds, Schapiro wanted money-market funds to have floating values. Instead of $1 a share, a fund could drop to, say, 98 cents if its underlying investments had lost money. Schapiro also wanted the companies managing money funds to post more capital to cover investor losses.
The proposal also would have prevented investors from withdrawing their entire accounts at once to prevent runs.
“The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away,” Schapiro said in a statement. “Money market funds’ susceptibility to runs needs to be addressed.”
The U.S. Treasury said Thursday that it would press further to revamp regulations.
“Treasury is in the process of consulting with the Federal Reserve Board, the Securities and Exchange Commission and other regulatory agencies to consider the appropriate next steps to reduce risks to financial stability from money market funds,” spokeswoman Suzanne Elio said in a statement.
Money-market funds play an important role in finance. They invest in short-term assets, including U.S. government bonds and commercial paper that companies use to finance immediate cash needs.
Some analysts said the SEC’s regulations could have unintended consequences that could potentially harm investors and companies’ sources of short-term capital.
“It would diminish the appeal to individual investors greatly,” said Greg McBride, senior financial analyst at Bankrate.com. “And it would also make it a lot more difficult for money market fund providers to make a profit.”
