Money fund industry veteran and expert Jack Winters is the latest to add his two cents to the SEC's recently-proposed "Money Market Fund Reforms". Though Winters comments are radical and likely "off-the-reservation" as far as the ICI and mutual fund industry are concerned, he is the most serious commenter to date and certainly the most experienced with money market funds.
Winters' letter, dated July 23, says, "I have been involved in the money fund industry since 1976 on the buy side (Federated, Lehman, Bear Stearns, Fidelity, Credit Suisse), the sell side (Lehman), as a consultant (iMoneyNet), and now as an unaffiliated observer. With my experience and the fact that I am not affiliated with any firm, I believe that I can offer informed and objective comments on the challenges facing the industry. I will first offer general comments about money fund risk and then address specific topics on which the SEC has sought comment."
He continues, "My comments are based upon the following facts and assumptions: 1. FACT: A credit incident with one money fund led to a classic liquidity run on virtually every money fund which led to systemic failure as the funds were unable to sell securities in sufficient amounts to meet redemption orders. 2. FACT: The money fund industry was bailed out by the U.S. Treasury and the Federal Reserve. 3. ASSUMPTION: The U.S. Treasury desires to decommission its Temporary Guaranty Program for Money Market Funds and allow the industry to resume operations independent of government assistance. 4. ASSUMPTION: The SEC, U.S. Treasury, Federal Reserve, and Obama Administration do not want to be in a position to have to bail out this industry again."
Winters argues in his "Summary Comment: The SEC's recently proposed regulatory changes are a step in the right direction but will not materially reduce the systemic risk that is embedded within money market funds." He says, "More substantial changes will be necessary to avoid future runs and bailouts."
The comment letter explains, "The SEC's proposal document released on June 30, 2009 is extremely thoughtful and well written. In comparison with the recommendations made by the money fund industry itself (ICI Money Market Working Group - March 17, 2009), it is a bit more restrictive. But let us not forget the near-death experience of September 2008 in which the industry suffered a classic 'run on the bank' as a result of The Reserve Primary Fund's credit loss and subsequent liquidity squeeze that quickly infected virtually every money fund. Fund operators could not meet panicky redemption requests and securities could not be sold in the marketplace. Industry assets might still be frozen today if the Treasury had not guaranteed all money funds and if the Fed had not provided a number of liquidity sources."
Winters theorizes, "In all honesty, industry participants must acknowledge that every prime money fund effectively broke the buck during that period in September when there were no bids for AAA commercial paper. Within the context of this bailout, the SEC Commissioners and the industry should recognize that substantial regulatory changes need to be made before we can believe that systemic risk is materially reduced. Without those changes, it is likely that the Fed and U.S. Treasury will be called upon to bail out the industry again." The letter continues on to lay out possible options and comment on various aspects of the SEC proposal.
