SEC Making Money Market Funds Safer
Monday June 29, 2009
Financial District (Credit: Mario Tama /Getty Images)
What It Means to You
On September 19, 2008, a record $140 billion was pulled out of money market funds. This led to the Reserve Primary Fund falling below $1 a share. This withdrawal signaled the beginning of the credit crisis that led to the current recession. In response, the Federal Reserve added $540 billion as a cushion to bail out money market funds.SEC Chair Mary Schapiro was appointed by President Obama to increase SEC regulations. One of her first steps was to prohibit employees from trading securities in companies the SEC is investigating. The SEC had been criticized for missing the Madoff ponzi scheme.
A big part of Obama's campaign was increased regulations to restore confidence in the financial sector. Unregulated use of derivatives that caused the bubble and subsequent bust that led to the current recession.
(Source: Bloomberg, SEC Proposes Money Market Rules, June 17, 2009; WSJ, SEC Slaps Trade Ban on Staff, May 23, 2009)
Comments
There is only two real regulation of the financial market – both go to tying up capital (hence the ability to leverage):
1) The Fed funds rate. Make that proportional to the amount of lending a financial entity undertakes (liabilities)
2) Capital required on the balance sheet has to be proportional (30% or 50% or such) to “new instruments” or “modified instruments” that don’t trade on the open market.
There cannot be any more of the “off balance sheet” transactions for the above to work.
SEC (or for that matter Fed) had no clue of how to value CDO’s and we found out neither did most of the banks. Having used Hull & White model to value embedded options on bonds, I can honestly tell you, it comes down to what underlying assumptions you make on the term structure and the variables that go into it. And then there is extensions uniquely created by each company.
There is no way anyone can find a human based regulation of such exotic mathematical models developed in software.
We want 21st century regulation but you can’t have a naive congress or a president make these decisions. Also, since humans need data and tons of data has to be processed in non-real time today, the problem will have happened by the time SEC or the Fed figures it out.
Hi Madwesh,
Very well put, as usual.
I agree, as I state in my article on Federal Regulations. “Regulations cannot prevent the kind of innovation that created products like credit default swaps. These products arise in unforeseen areas because that is where the profit exists.”
Kimberly