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HomeSEC’s New Money Market Fund Rules
Posted by Larry Doyle on January 29th, 2010 10:44 AM |
Sense on Cents once again thanks our friends at 12th Street Capital for providing tremendously useful information and analysis. What do we learn today? The new rules adopted by the SEC for money market funds.
The overview of these rules is provided by Orrick, Herrington and Sutcliffe LLP. The driving force behind the new SEC rules is an effort to promote greater disclosure and liquidity within money market portfolios. After the crisis of 2008-whenever (it’s not over yet), money market funds were and are much riskier than previously perceived. The risks lay in the fact that these funds invested in a fair amount of risky assets. Now that the government backstop of this industry has ceased, the new rules are needed for the industry to move forward.
Investors need to know that when these rules are effective (sometime in 2010), funds can ‘break the buck’ ($1.00 NAV, net asset value) and suspend redemptions.
Navigate accordingly knowing that the money market industry is not what it used to be.
Thanks again to 12th Street and to Orrick for this 2-page overview. Click on image to open pdf document:
LD
Money Market Funds Losing Uncle Sam’s Support…Today!!
Posted by Larry Doyle on September 18th, 2009 3:34 PM |
Our equity and bond markets reflect lessened risks and increased economic recovery, right? Well, investors in money market funds are taking on significantly greater risk today, whether they know it or not. How so? Today is the day that Uncle Sam is ending his federal backstop for money market funds. What does this mean? On a going forward basis, money market funds may very well ‘break the buck.’
Traditionally, the money market industry has prided itself on its ability to market these funds as being the effective equivalent of bank deposits. Bank deposits, however, are federally insured up to 250k. Money market funds were presumed to have such safe investments that they would always maintain a $1.00 NAV (net asset value). That ’sales pitch’ worked for a long time until a year ago when Lehman failed. A number of funds holding short term debt issued by Lehman, as well as other questionable assets, were poised to ‘break the buck.’ Hank Paulson and Ben Bernanke realized they needed to step in to stem this flow of money so they implemented a federal backstop of these money market funds. That backstop ends . . . today!! As such, whether investors appreciate it or not, they now have significantly more risk in these funds.
This story is receiving very little focus in the midst of all else that is going on along our economic landscape. That said, it bears real attention. The Wall Street Journal provides a cursory overview today in writing, Treasury Winds Down Money-Fund Backstop:
Now that the panic that flowed through financial markets last year has eased, the U.S. Treasury Department is making way for an usual rescue program set up to protect money-market funds to expire Friday.
U.S. officials established the Guarantee Program for Money Market Funds one year ago, during the height of the financial crisis, in the wake of the failure of Lehman Brothers Holdings Inc.
But now that an economic recovery might be taking hold, the government is allowing the program to wind down.
“As the risk of catastrophic failure of the financial system has receded, the need for some of the emergency programs put in place during the most acute phase of the crisis has receded as well,” Treasury Secretary Timothy Geithner said in a statement.
Secretary Geithner may be premature because although markets have recovered, a number of sectors of our overall economy remain severely stressed. The investment assets correlated with these sectors are no longer deemed as safe as once thought.
While the panic on Wall Street has obviously passed, investors in money market funds should not blindly accept that these funds will maintain a $1.00 NAV going forward. The fact is, many of these funds do have investments in a variety of short term instruments that have declined in value.
While the SEC has recently implemented rules in an attempt to insure that money funds will have sufficient liquidity for investors, those rules do not guarantee that funds can’t or won’t break the buck.
I strongly encourage investors in money market funds to check with their brokers or financial planners to review the nature of the underlying assets in their money market funds. I would particularly look out for investments in any type of auction-rate securities.
In addition to this caution, I would also strongly encourage investors in municipal money market funds NOT to invest in funds which have investments in the newly designed municipal auction-rate security known as x-Tender or Windows.
In the Brave New World of the Uncle Sam economy, ‘Buyer Beware!’
LD
Related Sense on Cents Commentary:
No Time for Complacency on Insurance and Money Fund Exposures (July 29, 2009)
Municipal Money Market Funds: Caveat Emptor (June 29, 2009)
The Buck Is Beginning to Break (June 25, 2009)
No Time for Complacency on Insurance and Money Fund Exposures
Posted by Larry Doyle on July 29th, 2009 1:02 PM |
Despite the rise in the equity markets and supposed hints of stability in the economy, this is no time to get complacent about your investments. The transition we are experiencing in the economy and the markets will present real opportunities, but also real risks.
On the topic of risks, it is of paramount importance that all investors get full information from your brokers and financial planners across all your exposures. Do not allow those managing your money to indicate ‘the market feels OK here’ and leave it at that. Why? Significant underlying fundamental risks remain in the market. I am reminded of two of them this morning as I read the following about insurance companies and money market funds:
1. Experts Call for Fed Involvement in Insurance Industry — but to Different Degrees; InvestmentNews, July 29, 2009
Members of Congress are being urged to create — at a minimum — a new regulatory body within the federal government to focus on the insurance industry. “There is some systemic risk in insurance requiring a regulator,” said Travis Plunkett, legislative director of the Washington-based Consumer Federation of America, who was part of a panel of experts testifying today at a Senate Banking Committee hearing on modernizing insurance regulation.
“In order to fully understand and control systemic risk in this very complex industry, the federal government should take over solvency and prudential regulation of insurance as well.
This shift in regulatory oversight of the insurance industry would be a massive undertaking. Recall that all insurance companies are currently regulated at the state level; however, state insurance reserves to protect policyholders against defaults are woefully deficient.
The Wall Street Journal touches upon this as well, in writing Syntax Error? Life Insurers and Earnings:
Some life insurers used the recent market upturn to raise more than $10 billion in combined capital. Hartford Financial Services Group and Lincoln National, which report after the market closes Wednesday, accepted Treasury Department money. The injections have scaled back doomsday scenarios, as well as liquidity concerns that made a few insurers short-selling favorites.
At Hartford and Lincoln, analysts are watching closely to see if the government bailouts may be tainting the insurers in consumers’ eyes.
While certain banks were forced to take TARP money, for Hartford and Lincoln taking TARP became a necessity. If I had exposure to these institutions, I’d be monitoring them very closely. I’d do the same with all my insurance exposures.
2. Money Funds Are Ripe for ‘Radical Surgery’; Bloomberg News; Jane Bryant Quinn writes:
I’m among the last people standing who think that Paul Volcker is right about money-market mutual funds. They pose a systemic risk to the financial system and need a radical fix.
When a central banker of Volcker’s magnitude raises a concern of systemic risk, I am all ears. Virtually the entire money market industry is currently backstopped by Uncle Sam. How many of these money funds may ‘break the buck‘ without some form of assistance? Bryant asserts:
In most cases, money-fund sponsors have come to the rescue of their funds if any question arose about the $1 value of their shares. Peter Crane, president and founder of Crane Data LLC in Westboro, Massachusetts, says as many as one-third of the funds will have needed support by the time this global financial squeeze abates.
But you can’t be sure that sponsors will always be willing or able to bail out their shareholders, says Jack Winters of Hingham, Massachusetts, an expert who worked in the industry from 1976 to 2008 and commented on the SEC proposals.
“Dealers supported auction-rate securities for 25 years until their financial situation precluded it,” Winters says.
We know all too well how the ARS debacle unfolded.
No time for complacency!!
LD
Related Commentary
Got Insurance? 529 Plans? Financial Aid? Read On…
Municipal Money Market Funds: Caveat Emptor
Posted by Larry Doyle on June 29th, 2009 6:17 PM |
If and when your money market fund “breaks the buck,” will you be there to collect the change?
I believe it is increasingly likely that money market funds will “break the buck.” The recent SEC statement put forth by SEC Chair Mary Schapiro, which I highlighted in writing “The Buck Is Beginning to Break”, addresses this topic.
In that post, I specifically referenced my concern for municipal money market funds given the recent launch of a municipal version of an Auction-Rate Security, designated as an x-Tender by Wall Street. I walked you through the processing and packaging of this mystery meat in writing, “The Wall Street ‘Sausage Making’ Process.”
Today the Wall Street Journal offers another whiff of the factory and gives us further reason to stay away from municipal money funds specifically. The WSJ writes, Mutual-Fund Giants Give Mixed Reviews to SEC Proposals:
The SEC proposed requiring retail money-market funds to have at least 5% of their assets in cash, U.S. Treasury Securities or securities that are accessible within one day and at least 15% in assets that can be converted to cash within a week. Institutional money-market funds would be required to have at least 10% of assets in instruments that could be converted into cash within one day and at least 30% in securities that could be converted within one week. The rules wouldn’t apply to tax-exempt, municipal money-market funds. (LD’s emphasis)
Why and how is it that newly designed rules for a $3.8 trillion sector of the market can exclude a sector encompassing municipal funds? My antennae went up immediately upon reading that. What is different about municipal money market funds that would exclude them from a set of rules designed to protect investors?
Why doesn’t the WSJ itself pursue this line of questioning in writing the article. How can the industry segregate municipal money market funds?
Municipal finance has been largely dependent on newly defined Build America Bonds which entail an obligation by Uncle Sam. Call me suspicious, but I wonder if the exclusion of municipal money market funds is due to the hoped for salvation of municipal finance via the municipal auction-rate security, x-Tender, otherwise known as Porky Pig here at Sense on Cents.
I will keep my nose to the ground in an attempt to sniff this out. Anybody who can help us determine the nature of this stench, please share. In the meantime, stay away from municipal money market funds.
LD
The Buck Is Beginning to Break
Posted by Larry Doyle on June 25th, 2009 12:31 PM |
Investors in money market funds are generally under the assumption that those funds would always maintain a $1.00 NAV (net asset value). Well, investors should lose that assumption and prepare themselves for funds beginning to ‘break the buck.’ Do not panic, but let’s review developments in this $3.8 trillion sector of the market.
When markets were seizing up last September upon the failure of Lehman Bros., the U.S. Treasury provided a temporary backstop of money market funds so they would not break the buck and cause a “run on the fund.” Here is the Treasury statement from last September: Treasury’s Temporary Guarantee for Money Market Funds.
From that site, you will see links to other Treasury announcements on this topic. One of those links is Frequently Asked Questions About Treasury’s Temporary Guarantee Program for Money Market Funds. I strongly recommend investors review these FAQs. I specifically highlight the question regarding funds’ ‘breaking the buck.’
What if another fund in an investor’s fund family breaks the buck before this program starts? Is the investor covered?
The program provides a guarantee on a fund-by-fund basis up to the amount of shares held as of the close of business on September 19, 2008. The performance of a different fund, even one in the same fund family of the investor’s fund, doesn’t affect the investor’s fund’s eligibility. Investors should contact their fund to determine if their fund participates in the program.
The temporary guarantee was extended on March 31, 2009 as highlighted by this Treasury announcement: Treasury Announces Extension of Guarantee for Money Market Funds.
Well, investors should prepare themselves for this guarantee of money market funds to end and that certain funds will begin to ‘break the buck.’ One does not need to be a savant to see this development in a recent release from SEC chair, Mary Schapiro. Here is the full SEC Statement on this topic.
Let’s address a few critically important points . . . (more…)
Libor Creeping Higher
Posted by Larry Doyle on March 11th, 2009 5:45 AM |
For those involved in the markets, very often the first rate one checks in the morning is Libor (London Interbank Offered Rate). For those not directly involved in the markets, perhaps tomorrow morning or Thursday you may start your day by asking your partner, “where’s Libor?” In all seriousness, the 1 month and 3 month Libor rates may very well be the most closely watched indicators of market health in the world.
As Libor is the rate at which banks can borrow from each other in the London market, the rate is an indication as to the availability of dollars and the confidence banks have in each other’s credit. Traditionally, Libor tracked the Federal Funds rate (the rate at which banks borrow from the Federal Reserve) very closely. However, on the heels of the failure of Lehman Bros. last September, the confidence banks and investors had in each other plummeted. The relationship between the Fed Funds rate and 3 month Libor blew out. The 3 month Libor rate went as high as 4.7% from just outside 1%. Recall that at that period there was concern about money market funds “breaking the buck” amongst a whole set of other issues. (more…)
February 2009 Market Review
Posted by Larry Doyle on February 28th, 2009 10:13 AM |
Prior to going to the comments section of my son’s report card, human nature dictates that I first look at the grades. In that same vein, let’s see how the markets performed for the month of February:
Let’s review my specific projections from the January 2009 Recap: (more…)
The Case for Sense on Cents
Posted by Larry Doyle on February 27th, 2009 10:24 PM |
Welcome to Sense on Cents!!
Why am I so enthused about the potential for this site? I could write at length in answering that question, but in short I firmly believe the “product” delivered here is in very strong demand and very short supply. Collectively as we navigate the economic landscape we will learn, share, and become more comfortable with the economy, the markets, and global finance. While the economy dominates our news currently, where can one go to make sense of it? Welcome to Sense on Cents!
Sense on Cents is truly a reflection of my professional instincts and personal interests. I sincerely believe this site can elevate the level of financial literacy, economic knowledge, and market insights for those who come here. Additionally, I am pleased to provide a wealth of information on career planning, global perspectives, financial primers, and meaningful literature. The sharing of opinions and active dialogue are strongly encouraged. I hope you feel comfortable coming here, find it to be of great value, will offer your perspectives, and will spread the word! While making “sense on cents,” I feel strongly we will find the relationships and returns to be very rewarding, especially relative to the risks!
I thank Larry Johnson for his tremendous support from my very first day at No Quarter and look forward to a continuing, close working relationship with him, Susan, and all involved at NQ. I sincerely hope and believe our efforts can and will promote our mutual interests.
(more…)
Caveat Emptor
Posted by Larry Doyle on February 25th, 2009 8:49 AM |
The equity markets across all sectors have gotten off to a very rocky start for 2009 (down 15% on average). In the midst of that, a lot of institutions and individuals have fled to the safety of short term government funds, money market funds that now benefit from a government backstop, and other cash alternatives. On average, these investments pay Wall Street and fund managers perhaps anywhere from .1% to .3% of the assets being managed. Those fees will not make the managers rich anytime soon. How do they respond? Welcome to the world of “principal protected notes.”
These structured notes are marketed to track an underlying index (say the S&P 500) while guaranteeing no loss of principal. Wow. Sounds like a great product. Where do I sign? Well, hold on just a second. I am not stating that structured notes do not have some degree of merit, but one needs to be very cautious in fully understanding how these notes work before purchasing. (more…)
