Attempts to make sweeping changes to a popular type of mutual fund that played a central role in the 2008 financial crisis have been derailed.
The chairwoman of the Securities and Exchange Commission, Mary L. Schapiro, wanted to bring her vision for regulating money market mutual funds to a vote as early as next week. But Ms. Schapiro acknowledged on Wednesday evening that three of the five commissioners opposed her plan and said she was calling off the vote. (...)
Until the financial crisis, money market funds were considered a dull, low-return corner of the markets. But now, most of the nation’s top financial regulators view the sector as one of the most vulnerable parts of the American financial system. (...)
Regulators view the funds as vulnerable because they act like banks by taking in money and promising to return every dollar that investors put in. Unlike banks, though, they do not have to pay deposit insurance or keep capital buffers to protect against defaults.
The funds, which provide short-term loans to banks and other borrowers, grew wildly over the last 30 years because they typically offered a higher return than bank accounts and at their peak held $3.8 trillion.
Most investors have used the funds like low-risk bank accounts from which money could be immediately withdrawn.
But in the financial crisis the vulnerability of the funds was laid bare. In September 2008, the Reserve Primary Fund suffered losses on $785 million of debt issued by Lehman Brothers and fell below $1 a share, known as “breaking the buck.”
Investors fled the Reserve Primary Fund and a panic ensued in which they withdrew about $300 billion from money market funds in one week, contributing to the credit freeze that gripped global markets. The Federal Reserve and the Treasury Department stepped in to bail out the money market fund sector with a guarantee and a special loan facility.
The S.E.C. voted in 2010 to introduce several new rules aimed at making the funds more stable. The most significant change forced fund managers to hold more assets that could be easily sold for cash. (...)
“Money market funds effectively are operating without a net,” Ms. Schapiro said.
The chairwoman of the Securities and Exchange Commission, Mary L. Schapiro, wanted to bring her vision for regulating money market mutual funds to a vote as early as next week. But Ms. Schapiro acknowledged on Wednesday evening that three of the five commissioners opposed her plan and said she was calling off the vote. (...)
Until the financial crisis, money market funds were considered a dull, low-return corner of the markets. But now, most of the nation’s top financial regulators view the sector as one of the most vulnerable parts of the American financial system. (...)
Regulators view the funds as vulnerable because they act like banks by taking in money and promising to return every dollar that investors put in. Unlike banks, though, they do not have to pay deposit insurance or keep capital buffers to protect against defaults.
The funds, which provide short-term loans to banks and other borrowers, grew wildly over the last 30 years because they typically offered a higher return than bank accounts and at their peak held $3.8 trillion.
Most investors have used the funds like low-risk bank accounts from which money could be immediately withdrawn.
But in the financial crisis the vulnerability of the funds was laid bare. In September 2008, the Reserve Primary Fund suffered losses on $785 million of debt issued by Lehman Brothers and fell below $1 a share, known as “breaking the buck.”
Investors fled the Reserve Primary Fund and a panic ensued in which they withdrew about $300 billion from money market funds in one week, contributing to the credit freeze that gripped global markets. The Federal Reserve and the Treasury Department stepped in to bail out the money market fund sector with a guarantee and a special loan facility.
The S.E.C. voted in 2010 to introduce several new rules aimed at making the funds more stable. The most significant change forced fund managers to hold more assets that could be easily sold for cash. (...)
“Money market funds effectively are operating without a net,” Ms. Schapiro said.
by Nathaniel Popper, NY Times | Read more:
