University of Pennsylvania Law School professor Jill Fisch published a paper last month called "The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform." In the Abstract for the 61-page paper, she writes, "Since the 2008 financial crisis, in which the Reserve Primary Fund 'broke the buck,' money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis, in part because widespread redemption demands during the days following the Lehman bankruptcy led to a freeze in the credit markets. The response has been to deem MMFs a component of the nefarious shadow banking industry and to target them for regulatory reform." She adds, "More fundamentally, pending reform proposals could substantially reduce the utility of MMFs for many investors, which could, in turn, dramatically reduce the availability of short term credit. The complexity of regulating MMFs has been exacerbated by a turf war among regulators. The Securities and Exchange Commission has battled with bank regulators both about the need for additional reforms and about the structure and timing of any such reforms. Importantly, the involvement of bank regulators has shaped the terms of the debate. To justify their demands for greater regulation, bank regulators have framed the narrative of MMF fragility using banking rhetoric. This rhetoric masks critical differences between banks and MMFs, specifically the fact that, unlike banks, MMF sponsors have assets and operations that are separate from the assets of the MMF itself. Because of this structural difference, sponsor support is not a negative for MMFs but a stability-enhancing feature. The difference between MMFs and banks provides the basis for a simple yet unprecedented regulatory solution: requiring sponsors of MMFs explicitly to guarantee a $1 share price. Taking sponsor support out of the shadows provides a mechanism for enhancing MMF stability that embraces rather than ignoring the advantage that MMFs offer over banks through asset partitioning." The author posits in the Introduction, "Specifically, this Article proposes that regulators require MMF sponsors to stand behind their MMFs by committing to maintain the stable $1 net asset value. In a time of crisis, sponsors could provide such support by buying distressed assets from the fund, reducing management fees or subsidizing the fund with other business revenues. Sponsors could also privately insure their obligation. Mandatory sponsor support offers several advantages over existing reform proposals. It would both prevent MMFs from breaking the buck and enable market discipline to limit a sponsor's incentive to take excessive risks with MMF portfolio assets. Required sponsor support would also eliminate market uncertainty about the extent to which a sponsor would voluntarily support its fund in a time of crisis -- uncertainty that contributed to the turmoil surrounding the events at the Reserve Primary Fund. Sponsor support would substitute sponsor financial stability for the need for investors to monitor the quality of MMF assets directly. Most importantly, sponsor support would address MMF fragility while allowing MMFs to continue to meet investor demand for a liquid stable value cash management option."
