WSJ Opinion: Rosengren says "Money-Market Funds Still Need Reform". He writes, "Yet more needs to be done to prevent another damaging run on prime money-market funds. Prime funds take on substantial credit risks but -- despite the caveats in their prospectuses -- create an implicit expectation among investors for a fixed net asset value and immediate access to their money. Moreover, prime funds have no capital buffers to absorb credit losses, which implies the potential for a loss of principal. When investors become concerned about the ability of funds to maintain a fixed net asset value, a rational response is to redeem shares quickly while they are still worth $1, which is precisely what we witnessed in 2008. The degree of credit risk taken by some funds remains significant and inconsistent with investors' perceptions of a low-risk, highly liquid investment. Lehman Brothers securities were not the only distressed instruments held by money-market funds in 2008. Several other securities held by money-market funds defaulted -- including a number of complex products such as structured investment vehicles (some of which issued short-term paper collateralized by subprime mortgages), which ultimately lost significant value. More recently, more than 60 prime funds held securities in Dexia in 2011, the same year the troubled French bank needed support from the French and Belgian governments."
