WASHINGTON — Investment firms sparred with regulators Tuesday over the potential risk money market funds could pose to the financial system.
The Securities and Exchange Commission held a roundtable to discuss how to make the money market fund industry more stable during times of stress, as well discuss several proposals including eliminating a set stable asset value for the funds in order to avoid a possible run on the fund.
But some ex-regulators suggested such fears might be overblown.
"Money market funds have been enormously successful," said John Hawke, a partner at Arnold & Porter and former Comptroller of the Currency. "It paints a misleading picture that money market funds are susceptible to runs. Their assets are money good."
A money market fund is an open-ended mutual fund that invests in short-term debt securities and serves as important providers of liquidity to financial intermediaries. Typically, money market funds seek to maintain a stable value of $1 per share.
But as seen in the financial crisis, the oldest money fund, the Reserve Primary Fund, broke the buck when its shares fell to 97 cents after writing off debt issued by Lehman Brothers Holdings Inc., a day after it filed for bankruptcy.
"Clearly the investment is not risk free," said Federal Deposit Insurance Corp. Chairman Sheila Bair. "It was a model that was broken."
The failure nearly caused a run on the money market funds as investors quickly sought to redeem their holdings.
To halt a run, the government responded by introducing a program that would restore a covered fund's net asset value if it fell below a $1.The guarantee was backed by assets of the Treasury Department's Exchange Stabilization Fund.
"Regulators should be worried about moral hazard," said Bair. The expectation is that "if something goes wrong again … that the government is going to step in."
Still, some like Robert Brown, president of the money market group for Fidelity Management & Research Co., said money market funds should be left untouched and not be regulated like banks.
He said the events of 2008 were "not a significant run," but instead showed "great resiliency in the fund."
Others like Hawke agreed there would be "great danger" in reengineering the money market fund potentially causing "unintended consequences."
Even if regulators made significant changes, Carol DeNale, senior vice president and treasure of CVS Caremark, said such funds would "not be easily replaced" given that they are a core part of the capital structure.
Instead, other panelists suggested regulators should be looking at access to the reserve fund in the event of a crisis.
"How do you deal with emergency liquidity needs? How do you deal with those extraordinary situations not caused by the money market fund, but when investors want to cash in?" said Hawke.
Paul Tucker, deputy governor of financial stability for the Bank of England, agreed the focus of the debate should center on how to manage the guarantee.
"How do you build a regime that offsets or either takes away the implicit liquidity guarantee, or makes explicit the liquidity guarantee … this is what the debate is surely about," said Tucker.