By now, BankThink readers are well aware that
David Merkel at Aleph Blog
"Let there be stable net asset values, freedom in investment guidelines, but the possibility of credit events," Merkel writes. In other words, investors in the funds should know going in they might lose money. If a fund breaks the buck – that is, if the market value of its holdings falls significantly below par – Merkel says it should tell investors they’ve taken a hit. The share price could remain at $1 but the number of shares would be reduced, so the investors would no longer be able to withdraw a dollar for every one they put in. In return for sacrificing safety (or, rather, the illusion of it), money market funds would be allowed to take more risk, and potentially generate higher returns. No false sense of security, no federal backstop.
Merkel, an asset manager, first
And for a moment, Merkel sounds a little bit like
But unlike money fund industry advocates, Merkel does not want to preserve the status quo. He quickly adds: "I say let money market funds fail, and do not increase regulations on them. Regulate the banks tightly, but let money market funds go free, but advertise that losses are more than possible."
Marc Hochstein is the Executive Editor of American Banker.