Money market accounts could soon join "free checking" in the dustbin of retail banking history.
That's what various portfolio managers who make up a large chunk of the industry are saying could happen if regulatory provisions being discussed in Washington are enacted. The new rules, still to be officially proposed by the Securities and Exchange Commission but being widely discussed behind the scenes, are meant to protect the money market by preventing panic in a financial crisis.
But asset managers do not see things that way.
"The generosity of giving you the choice of which way to die is really not much of a choice," J. Christopher Donahue, president and chief executive of large portfolio manager Federated Investors, told the Wall Street Journal about the upcoming rules. His firm -- which handles assets constituting about 10 percent of the $2.66 trillion investors hold in money funds -- is planning to sue the government once rules are released, the newspaper reported.
"We're going to do everything in our power to attack it," Donahue said.
In a Feb. 3 letter to the SEC, Fidelity Investments, another portfolio manager that handles an even larger chunk of the market -- $433 billion -- said reforms being discussed "could spark retail and institutional investors to pull significant amounts of assets out of money-market mutual funds, leading to unintended consequences for the financial markets and U.S. economy." The letter cited internal research among Fidelity clients that suggested 47 percent of retail investors would close out or pull money out of their money market accounts if specific rules are enacted.
Floating value, fleeing customers
"Money funds and their institutional investors are keenly opposed to floating the NAV (net asset value) on their funds," Joseph Abate, interest rate strategist for Barclays Capital, wrote in a recent research note to clients, referring to a proposal industry insiders find particularly objectionable.
"Floating the NAV," which is one of the things the upcoming SEC rules are believed to require of fund managers, involves reporting the actual mark-to-market value of securities held in money market funds at regular intervals. Current rules allow fund managers to report projected values.
Other rules being considered include obliging portfolio managers to set aside a percentage of the amount deposited in money market accounts as capital buffers, and another rule preventing people from withdrawing all the money in their money market account immediately -- they'd have to leave 5 percent of the balance in the fund for 30 days after requesting a full withdrawal.
While these measures are intended to prevent "runs" on money market funds, in which a large portion of depositors suddenly ask for their money back, they would also eat into the margins such funds would be able to yield, making them less attractive overall.
- "As a result, it is unclear how much of the institutional money held in money funds ... would 'go elsewhere'," Abate wrote in his note.
Main Street Savers and Wall Street Investors
Assets in the nation's retail money market accounts amounted to $926.52 billion last week, according to industry data. The difference in the balance is made up by institutional money market funds, used by investors wishing to park their cash in ostensibly ultra-safe short term investment vehicles. The yield customers are being paid varies widely, but the national average, according to consumer finance Web site Bankrate.com, is an annualized 0.13 percent.
Once a saver (or an investor) puts cash into a money market account, portfolio managers use the funds to buy investment-grade notes -- generally ultra-short term government securities and day-to-day corporate loans known as commercial paper. What that all means is that, were the money market to shrink or fold altogether, public institutions and private corporations would see somewhat of a squeeze in daily financing.
Already, the commercial paper market has undergone a substantial amount of scaling-back, with the amount of this debt outstanding from financial institutions, for example, falling to levels below those seen in 2008, when the collapse of broker-dealer Lehman Brothers brought a financing squeeze.
The downfall of Lehman Brothers is actually instrinsically linked to the current regulatory issues. In Sept. 16, 2008, worries about money market funds being exposed to worthless Lehman Brothers commercial paper sparked a run on money market funds that was only halted when the government stepped in with a taxpayer-funded backstop.
The government is trying to prevent that from happening again and the issue for the regulators now is to strike the balance that protects the market without "finishing the job" that Lehman started.
Critics say they are far away from that balance.
The rules being hashed out by the SEC would "force an enormous number of sponsors out of the business and leave those that remain with a product that nobody will want to invest in or make available to investors," Paul Schott Stevens, president of the industry Investment Company Institute, told the Journal.