Now Available: Useless Money Market Funds

Money Market

The Securities and Exchange Commission’s new rules for making money market funds safer and more transparent for big investors became official last week, but they have been having an effect all year. Not a very good effect, though.

The funds’ customers have been abandoning them in droves.

Anyone with a fundamental understanding of how businesses used money market funds could have told you this would happen, and many of us did. This is a case in which being right does not bring much satisfaction, however.

As I observed in 2014, the final rules were less destructive than some of the original changes that the SEC proposed. But “less destructive” is still destructive. While individual investors were spared many potential headaches, institutional and corporate investors had little choice but to stock up on aspirin and start making new plans to manage their cash.

Consider Simon Gore, the treasurer of Spirit Airlines Inc., who spoke to The Wall Street Journal about the way the new rules complicated what was once a relatively simple job. Like many mid- or large-sized companies, Spirit had long parked its cash in money market funds as a way to protect principal and ensure the airline could meet its immediate cash needs. These funds offered a stable price of $1 per share. While they offered only small returns, they also offered stability and simplicity.

The new rules have put an end to both stability and simplicity. Instead, prime money market funds serving nonconsumer clients must allow net asset values to fluctuate, which creates both the possibility of assets losing value and the certainty of recordkeeping headaches. Gore and people like him must suddenly keep track of changes in their accounts’ value, the way they would in a traditional bond fund.

Just as we critics predicted, companies are pulling their assets out of prime money market funds. According to the Journal, assets under management at those funds have fallen by two-thirds this year, to $413 billion from $1.25 trillion at the beginning of 2016.

Corporate treasurers are still, by and large, working out where to put these funds now that money market funds have lost the characteristics that once made them so appealing. Gore said he has shifted much of Spirit’s cash to money funds that invest in government debt, since such funds are not subject to the new rules and can offer a stable share price. The same holds true for funds that invest in agencies such as Fannie Mae and Freddie Mac.

Doubtless some other administrators will just head for traditional banking, which at least offers the advantage of avoiding value-fluctuation recordkeeping, if nearly nothing in the way of returns. But the banks, subject to heavy-handed regulation themselves, are not going to be thrilled to receive all this new cash right now. Commercial loan demand is tepid and bank examiners impose unreasonable underwriting requirements that rule out many borrowers anyway. Some banks have already experimented with charging big customers for parking large sums in their accounts. And since deposit insurance is limited, large bank deposits are not without some degree of risk, too.

So what’s the big deal about pushing institutional and corporate investors to abandon money market funds? It isn’t one, as long as we don’t mind further choking off the supply of capital to medium and large businesses that routinely tap the money markets to finance inventory or plant expansions, or to accept large orders for which they won’t receive full payment until completion. It’s no big deal, if you don’t count losing the jobs that would be created, the retirement savings that would be generated and the taxes that would be underwritten by such profit-generating activity.

Of course, there is further irony in the fact that much of the money being pulled from institutional funds is being directed to the now-government-controlled housing agencies Fannie Mae and Freddie Mac, which underwrote the housing binge. That same housing binge, incidentally, caused the financial crash that triggered the failure of Lehman Brothers and the rest of the market meltdown in the first place. Lehman’s collapse led the Reserve Primary Fund to “break the buck,” which triggered the idea that money market funds needed reform.

Fannie and Freddie are the same two entities that the government seized as the price of its bailout. Now the government has tilted the playing field in its own favor, ensuring that it has a ready supply of cheap cash at the expense of the private sector. That state of affairs may not last indefinitely; Christina Kopec of Goldman Sachs Asset Management told The Wall Street Journal that corporate treasurers may move back out of government funds once the dust from the new rules settles. For now, though, assets under management at government money funds are up 72 percent from January as investors flee the broken private sector product.

The justifications for making money market funds “safer” by effectively destroying them are just as valid now as when the new rules were enacted – not at all. This is not merely a solution in search of a problem; it is a solution that is, itself, a problem. In this way, the rules are just one more element of an administration “legacy” of regulating that which it neither appreciates nor understands.

About Larry M. Elkin 552 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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