Despite Paul Volcker’s constant (and welcome) warnings about the systemic risk posed by money market funds, it wouldn’t appear that reforming them is a major priority in Washington.
However Casey Research’s David Galland (via TPC) wonders if Treasury isn’t already quietly trying to drastically shrink money market funds.
Note that just this week, Treasury announced that it would no longer backstop money market funds — a backstop initially put in place after panic over the Reserve Fund’s breaking of the buck. Galland finds the removal of this support, at a time of continuing economic frailty, rather odd. And indeed in two days after that investors yanked $55 billion out of such funds. Whether that’s the start of something bigger remains to be seen.
Galland brings up several important points in his report:
- The Reserve Fund was not the first money market fund that dropped below $1.00. He claims one un-cited study that 30% of funds at some point break the buck, though the management company always had the ability to replenish the necessary cash itself.
- Money market funds are still taking on real risk with heavy bets on CDs of foreign banks, as well as well as short-and-medium term paper associated with car loans, insurance, and other corporate entities.
- Yields are crap. Considering the risk you’re taking, why settle for .55% on your money, pre-tax.
Ultimately, Galland thinks Treasury wants to deflate this situation and instead encourage investors to put their money in bank deposits (helping banks) or Treasuries (helping the government meet its own funding needs), and he even wonders whether some of the most popular money market funds might be short candidate — an idea we’ve never heard before, and an idea, obviously, only suitable to a narrow band of investors.