Money Fund Lehman Moment Lurks as New Protections Stall – Bloomberg 09-05-13

Salient to Investors:

Sheila Bair at Systemic Risk Council, a nonpartisan group whose members include Paul Volcker and Paul O’Neill, said nothing has fundamentally changed to address the structural weaknesses of money funds.

To halt the 2008 Lehman-triggered run, the Treasury Department guaranteed all money-fund shareholders against losses from default. The crisis showed that money funds were vulnerable to runs that could damage broader credit markets.

The 10 biggest money-fund providers and ICI, the industry’s trade group, reported combined lobbying spending of $63 million from the beginning of 2011 through Q1 2013.

Only two money funds have ever dropped below $1. The Community Bankers US Government Mutual Fund in 1994 and The Reserve Primary Fund in September 2008.

Arthur Levitt said the failure to propose new rules for money funds is a national disgrace.

Walter Bettinger at Charles Schwab said in November that imposing a floating share price on prime funds used by institutions is the right thing to do to bring the debate to closure, but retail funds should be allowed to keep the fixed $1 share price.

ICI wanted to give money funds the ability to suspend withdrawals when a fund was under stress, and to impose fees on redemptions.

Mary Schapiro at Promontory Financial said there is no investment product that is risk-free, so would prefer fixing the structural weaknesses of a stable share price for all money-market funds.

Jaret Seiberg at Guggenheim Securities said the Fed and Treasury will declare victory if there is either a floating NAV or a redemption limit: if the SEC can’t get this, the FSOC will wade back in.

Read the full article at  http://www.bloomberg.com/news/2013-09-05/money-fund-lehman-moment-lurks-as-new-protections-stall.html

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