Tuesday, November 27, 2012

It Ain’t Money-Good No More



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 import 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 ninety 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 thirty-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.


Okay, 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?



  1. This money market fund (MMF) nonsense is just smoke and mirrors. The crooks in Washington want to mark MMF to market because they think that will put dinosaur banks on even footing with the MMF — providing a nice way to subsidize the collapsing FDIC bureaucracy.

    This has unintended consequences written all over it.

    We already see an increase in short term reserve funds, like MINT from Pimco (which is already being mimicked by similar offerings from iShares, Vanguard, Fidelity and Nuveen that I heard about, and probably others). The “temporary storage of cash” function of MMF will just evolve into a different vehicle, still outside the grabbing hands of government crooks.

    The secondary effect is a lot more interesting. Once you teach the public to start looking at things on a mark to market basis, what happens to all the big banks that are technically insolvent, but for various accounting magic? What happens to the insurance companies and quasi-finance companies (eg General Electric) that have been allowed to keep bogus assets on balance sheet at original cost instead of current market value? Mark FNMA, FHMLC and FHA to market and every one of them is insolvent.

    And in a couple years, what happens when Joe Plumber starts marking the Fed’s balance sheet to market? Hmmm?

    This Mark to market idea sounds like the sort of thing that sounds great in Bernanke’s pretend world of academia. But in real life, practical concerns matter a lot.

    My bet is that most *currently surviving* MMFs already stay pretty close to the buck (a few years back, there were a lot that bought toxic waste mortgages, etc — but consumers have been scared out of those funds already). So the effect on the bigger surviving funds might be to create artificial demand for more short term treasury debt, or it might push more consumers out of MMF into short term bond funds — something that 0% interest rates are doing already.

    But releasing the idea of mark to market into the public conscience will back fire on the greedy insolvent money center banks that currently bribe members of congress into saying “too big to fail” over and over.

    And the SEC will end up with even more egg on their face

  2. For those of not so in the know of finances, could you expand a bit on the possible consequences of this MMF rule change? I understand the long term effects of mark to market on the banks, but what could be the short term ones? I have the vaguest notion of the shadow banking system. Thanks.

  3. Perhaps this MMF move will be a positive – in the direction of lessening regulation. And in the direction of recognising and admitting that there is, ultimately, no way to avoid RISK.

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