clifp
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Oct 27, 2006
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I have heard enough discussion about this to know that it isn't completely bogus. How likely money market funds are to break the buck is something I don't know.
However, given the pathetic returns of money market funds it probably makes sense to move as much as possible to a FDIC insured bank or checking account.
The full WSJ article is here
However, given the pathetic returns of money market funds it probably makes sense to move as much as possible to a FDIC insured bank or checking account.
The full WSJ article is here
Amid the Greek mini-panic this month, did you notice the really shocking news? To wit, U.S. regulators are worried about the "systemic risk" posed by the exposure of American money-market funds to European bank debt.
That's right, nearly three years after the panic of 2008, our all-seeing regulators have somehow not fixed what was arguably the single biggest justification for government intervention at the time. In 2008, the feds felt obliged to guarantee all money-fund assets after they let the Reserve Primary fund pile into bad Lehman Brothers paper, Reserve broke the $1 net-asset value, and in the following days some $400 billion fled prime money funds. We'd have thought our regulatory wise men would have fixed this systemic risk before all others.
Yet now we learn that since 2008 U.S. money funds have been allowed to pile into European bank debt even as everyone knew those banks had stocked up on bad European sovereign paper. The Treasury is even saying privately that the U.S. needs to support the European bailout of Greece lest European banks fail, U.S. funds take big losses, and we get another flight from money funds....
Can this possibly be happening?
Yes, and this time it's an entire industry as opposed to a particular fund. Half the assets in U.S. prime money market funds were invested in European banks as of the end of May, according to Fitch Ratings. Apparently, our regulators were too busy writing 2,300 pages of Dodd-Frank law and thousands of new rules to notice the systemic risk that is right before their eyes.
The flight from money funds in 2008, and potentially now, highlights a key vulnerability of the financial system: Money funds are perceived as akin to bank savings accounts because they seem to be all but guaranteed against loss, even though they aren't. Even worse, they employ a creative accounting technique that rewards the first customers to head for the exits.
This investor conditioning is courtesy of a 1983 Securities and Exchange Commission rule that allows money funds to report a stable net-asset value of $1 per share, even if that's not precisely true based on changes in the fund's underlying assets. The result is that investors have come to expect that money funds never "break the buck," never decline in value. It also means that if big institutions notice that a fund's underlying assets start to decline, they have a strong incentive to get out quickly while their 99-cent investment is still officially valued at $1.