WASHINGTON, July 24, 2014 – The Securities and Exchange Commission (SEC) has announced it will slowly put in place a brand new, controversial rule that will change the money market fund landscape we all know and mostly love. That’s despite of only earning about 0.00000001% or thereabouts on our current deposits.
Invented back in the Stone Age when interest rate-based investments were significantly more rewarding, money market funds were created as an innovative new parking place mostly for idle investment funds. But they also proved attractive alternatives to passbook savings accounts, which many banks no longer seemed to care about.
Money market funds were and are at heart, mutual funds investing in trainloads of very short term financial instruments that essentially tracked day-to-day short-term interest rates. The innovation that made these funds popular: a simple, computerized calculation system that kept each share priced at exactly $1 all the time.
Since these funds charged minimum management fees and paid somewhat better than those dying passbook savings accounts or even interest-bearing checking accounts, it became easier for mortgage bankers to draw those funds onto their own books and off those of the banks.
On the consumer side, it also made parking those funds at your friendly local brokerage house easy, painless, and above all understandable. Money funds looked, smelled, and felt like bank accounts. Every buck was a buck, and your interest rate floated and could be tracked every day.
Further, given SIPC insurance on each brokerage account, you simply had another kind of insurance (based on shares held, not value) that sort of felt like FDIC insurance, providing plenty of peace of mind.
Unfortunately, like many things in 2007-2009, a few money market funds cracked by “breaking the buck.” In other words, withdrawals and risky commercial paper made it impossible for at least one, major, doomed fund to avoid breaking the buck. When it did so, an immediate run on the fund ensued.
The Fed, fearing a mass run on all funds, quickly shored them up with a large, temporarily Federal insurance guarantee while joining in efforts to ease the offending funds out of the picture.
Ever since, the govies have wanted to remove what they regard as the fiction of money market funds, i.e., that nominal $1 peg. And with the SEC’s just-announced rule, that’s what they’ve done.
Gradually but eventually, money market funds used primarily by large institutions will, in fact, float, price-wise, just like any normal every day mutual fund. Meanwhile, money market funds primarily serving small investors will be able to retain that $1 peg.
To us, it’s a crazy issue, but the current rules set up is likely to work okay, more or less. The problem that caused the mass exit from money market back in those bad old days, however, more or less still remains. Even then, it was really the institutions, stampeding for the exits, that caused the problem jeopardizing all money market funds. But even under the new regime, that problem still exists.
Yes, the new rule does impose circuit breakers, effectively freezing those large money market funds for short timeslices when a fund run appears imminent or is already underway. But if another massive panic does occur, who knows if this flimsy gate will work any better than 2008’s moral suasion.
In any event, thanks primarily to the tireless work of Charles Schwab & Co. and other brokerages geared to the business of the little guy, all the rest of us, excluding the big institutions, will more or less continue to be served up the same kind of $1 money market share peg we’ve all known and loved.
Thus, we get to avoid at least a little of the complexity that’s driven a lot of little guys out of the market. In this oligarch-centric, crony-capitalist environment, at least that’s something.