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Avoiding a Run on Money-Market Funds
Another breakdown in our financial system is the last thing we need if accelerated economic growth is our goal. The Securities and Exchange Commission chairman has suggested some rules to safeguard against one kind of trouble, but the vested interests have risen up in arms to stop the rules from even being officially proposed. The regulator is Mary L. Schapiro, and the potential trouble she wants to head off is a run on money-market funds. The vested interests are the mutual funds, which make a tidy profit off the $2.5 trillion in money-market deposits. The controversy is summarized in Gretchen Morgenson’s column in Sunday’s business section of The New York Times. One of Schapiro’s suggestions is requiring funds to set aside reserves against sudden, serial withdrawals, particularly by institutional investors that deal in large amounts of cash. Reserves lower profit margins, so the funds’ animosity is no surprise. Another suggestion is that money funds price their shares by the market value of the securities they hold, similar to how stock and bond mutual funds price their shares. The practice for nearly four decades has been to maintain, at all costs including fudging, a steady price of $1 a share. A variable price will scare away customers seeking stable value, the fund industry says, and it is probably right. The federal government had to shore up wobbling money market funds in 2008 when the Reserve Fund was unable to maintain its $1-a-share price (in part because it held a lot of Lehman Brothers paper) and a run started. As Morgenson notes, “Once the government steps in to stabilize an industry, we have learned to expect it will probably do so again.” Schapiro’s suggestions are not far-fetched, therefore. Moreover, money funds’ holdings currently are top-heavy with paper issued by financial companies — including many big European banks — so a run in this corner of the market could destabilize the global financial structure. Is such a disaster likely? Probably not, we think, with fingers crossed. But given what happened just four years ago — the effects of which we’re still struggling with today — it is a risk we cannot take.
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