A $3 Trillion Alarm Will Go Off At The SEC On January 18

Elisse Walter is an interesting choice to be the next top-dog at the SEC. She’s been at the Agency for six-years, so she knows where the bathrooms, and the dirty laundry can be found. She certainly looks mean enough for the job, but she has one big flaw on her resume. She’s a big-time Democratic supporter. 

Obama did not “nominate” Walter, he “designated” her to take over the job. This is an important difference as the President’s tactics eliminated any problems that might have come up in a Senate confirmation hearing. This is a bit unusual, so far there has not been a fuss. But this is DC and nothing is certain these days. My guess is that Elisse is a Temp as the head of the SEC. I’m also thinking she has been told to sit tight, and not rock the boat for a few months as the dust settles on the other issues floating around Washington. This is especially true when it come to matters of Dodd-Frank.

I bring this up because there is a very important issue on the SEC’s table right now. The clock started ticking a month ago. An alarm will go off on January 18, 2013, and 90 days later, the financial markets will go through a major transformation. The changes will be some of the most significant to occur over the past 30-years.  Millions of savers and $3 Trillion of deposits are now up in the air. As a result of the uncertainty, very big money may have to move around in the months to come. One never knows what will happen when, in a short period of time, the odd trillion changes its “address”. We’re almost certain to find out.

The details:

– A part of Dodd-Frank was to set up the Financial Services Oversight Council (FSOC). FSOC was charged with coming up with recommendations about what to do with Money Market Funds.

– FSOC came up with a plan. There is a window for public comment that ends on January 18, 2013.

– After Jan. 18, the 90-day countdown to implementation begins. There is nothing stopping implementation save, heaven help us, The SEC. From a Treasury report today (Link):

If the SEC moves forward with meaningful structural reforms of MMFs before April 21, 2013, it is expected that the Council would not issue a final recommendation.

OK, so if the SEC sits on its hands until spring, the FSOC plan comes into being. So what is the plan? Simple:

Floating net asset value –

Would require that MMFs’ share prices reflect the actual market value of their portfolio holdings.

It will not be so long after April that some MMF breaks the buck, and then who knows what?

For what it’s worth, I never thought there should be a “rule” that insures that MMFs can’t trade below 1.00. After all, the assets are primarily short-term IOUs of financial institutions that are not so highly rated. Add to the asset problem, the little issue of ZIRP. With no yield, there can’t be a cushion. So I agree that MMFs should be forced to float, and maybe its best that the SEC sits idly by, and lets it happens.

But it would be a mistake to think that this will not have repercussions. There are too many zeros involved.  Some shuffling of money from place to place is likely over the next few months. Basically, this will be a hit to the unsecured debt market, also know as the Shadow Banking System.

Probably will be no problem at all, right?

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