Capital Buffers Not a Bluff
August 3, 2012
There's no question that breaking the buck value of a share, permanently, would upend if not destroy the foundation of the money market mutual fund industry.
This is an industry that became a favored haven of institutions by being able to promise stability-like a bank account-of value, plus a return that beat alternatives-such as a bank account.
But now, as noted in "Flat Looking Up For Money Funds" in this issue, the no-return environment of the last four years has made money funds less and less attractive already, against bank accounts.
In an era when Treasury bills, bank accounts and money funds all generate returns that don't even match inflation, money gets parked where it is safest. That has been the commercial bank account, where any amount can be placed and be insured by the federal government. At least until December 31.
So the amount held in money funds by corporations and other institutions has dropped to $851.3 from $1.25 trillion at the end of 2008.
And if Securities and Exchange Commission chairman Mary L. Schapiro has her way, tougher rules are coming to the maintenance of money funds. In an effort to prepare for any future runs on the funds similar to what occurred in September 2008, she's talking about letting the value of a share float-or requiring capital be aside to be ready for the run. And limits on redemptions when a run comes.
The 10 biggest money-fund managers and the Investment Company Institute trade group have spent $16 million in the first half of 2012 and $31.6 million last year to try and prevent such "reforms,'' a compilation by Bloomberg News last week found. That compares to $16.7 million spent on lobbying in 2010.
But the $2.5 trillion industry had better be ready to settle for half a cake.
There's little likelihood or reason for Chairman Schapiro to back off, completely. Banks themselves are facing increasing requirements for their own capital buffers, after the financial industry nearly destroyed itself in the last decade. There is every reason for money funds to create their own capital buffers and compete head-to-head with all comers on returns. As long as the capital buffer playing field is level.
Conversations with money fund proponents indicate Chairman Schapiro is ready to back off on breaking the buck a share value of money funds.
But capital buffers are coming.