SEC’s Schapiro: U.S. risk council must push for money market reforms

English: Lehman Brothers headquarters in New York City (Photo credit: Wikipedia)

Reuters – The new financial risk council must consider what reform actions it can take to reduce the continuing systemic risk posed by money market funds, Chairman of Securities and Exchange Commission Mary Schapiro wrote in an Wall Street Journal op-ed.

Money funds were long a sleepy corner of the fund industry, collecting money from investors and serving as leading buyers of short-term debt from corporations, municipalities and the U.S. government.

But in September 2008, the Reserve Primary Fund, one of the largest money funds, suffered losses on Lehman Brothers debt and could not maintain its $1 per share price, known as “breaking the buck.”

That ignited a run of withdrawals from investors across the industry, cutting off a major source of overnight funding for many corporations. more> http://tinyurl.com/8f7z2f4

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The battle over money funds

Image @Wikipedia

By Thomas Cooley and Kim Schoenholtz – The run on U.S. MMMFs in September 2008 was a critical moment in the financial crisis. It underscored the extent to which these funds, an important part of the shadow banking system, created systemic risk that indirectly threatened the financing of even the healthiest U.S. firms. To end the run, the U.S. Government guaranteed MMMF liabilities, sustaining the funds’ promise to pay $1 for every share.

That guarantee stopped the run, but it also created enormous moral hazard. Were a similar threat to arise today, we can safely assume that taxpayers would remain on the hook to rescue the MMMFs. This uncompensated, rainy-day backstop constitutes a subsidy to the MMMF industry — and to its investors and borrowers.

Should taxpayers continue to subsidize the money market mutual fund (MMMF) industry? more> http://is.gd/ikNAVE

Related articles

• Money Market Funds – A Bad Deal Is About To Get Worse | LearnBonds.com (learnbonds.com)
• Bernanke: Money Market Funds Still at Risk of Runs (blogs.wsj.com)