I am afraid American Banker editor-in-chief Neil Weinberg misunderstood the point of my op-ed,
My point was simply that the profusion of "remedies" coming out of at least one federal bank regulatory agency evidences such a disregard for the consequences of these proposals that it is not unreasonable to conclude that they intend to destroy money funds.
As to the speculation by Weinberg and another commenter that fund investors may not know the risks they run or the FDIC insurance status of their investments, I know of no empirical evidence to support such a conclusion. The 30 million money fund investors receive full disclosures that while the funds seek to maintain a dollar per share they can lose value, are not bank deposits and are not FDIC insured. Those investors also can view their funds’ portfolio holdings in detail on the funds’ websites, as a result of reforms adopted by the SEC in 2010. Indeed, many investors choose money funds because they have a long record of safety—far greater than banks. For investors with balances in excess of FDIC insurance limits, money funds are a far better choice.
While Weinberg suggests that the Reserve Primary Fund situation caused a loss of investor confidence, that ignores the fact that long before the Reserve Fund broke a buck, investor confidence was already in tatters and the financial crisis was in full swing. By Sept. 15, 2008, the economy had been in recession for nearly a year, major stock indices were down 30% for the year and even further off their October 2007 highs, the auction rate preferred and asset backed securities markets had seized up, institutional and retail credit had sharply contracted, and a large number of our leading financial institutions had either been taken over, failed or been forced to merge, including AIG, Bear Stearns, Fannie and Freddie, IndyMac, Merrill Lynch and Lehman Brothers. The Reserve Fund episode, in the midst of this virtually unprecedented chaos in financial markets, undoubtedly caused some institutional investors some concern about the accessibility of their funds, but when Treasury and the Fed put temporary liquidity facilities in place investors quickly returned to the money funds. I assume Weinberg is aware, moreover, that investors in the Reserve Fund lost less than a penny on the dollar.
I agree that is appropriate to ask questions, but what we are seeing today is far more than mere inquiry -- it is a bewildering assortment of proposed "remedies" that is not informed by any detailed inquiry into the impact of the proposals being advanced. Moreover, Weinberg's comment suggests that he may not be aware of the significant regulatory changes adopted by the SEC in 2010. These changes not only substantially increased the liquidity requirements for money funds, but imposed significant disclosure requirements. In addition, the SEC’s monitoring and oversight of money funds is far more robust than it was in 2008.
I believe that before any additional changes are made to money fund regulation there should be time for a full assessment of the effectiveness of the SEC’s extensive enhancements to its money fund regulations and its oversight of funds, as well as a searching inquiry into the potential impact of any of the proposed reforms on individual and institutional investors, on business and government users of money funds, on issuers of commercial paper, and on the economy as a whole. What is being advocated by some officials, however, without the benefit of such inquiry, are transformational "reforms" to money funds that threaten to destroy their utility.
It is an established doctrine in the law that one is assumed to intend the normal and predictable consequences of one’s actions. Given the likely impact of many of the changes being advocated, it is not unreasonable to conclude that a very substantial curtailment, if not eradication, of money funds is intended.
John D. Hawke, Jr., a partner in Arnold & Porter LLP, Washington, DC, formerly served as Under Secretary of the Treasury for Domestic Finance, Comptroller of the Currency and General Counsel to the Board of Governors of the Federal Reserve System. He represents Federated Investors, Inc., a sponsor of money market mutual funds.
