Tuesday, January 5, 2010

Money Market Funds - Heads-up!!!

Here is some spooky stuff you won't learn from watching TV, even the financial network channels:

The government is about to change the rules on Money Market fund withdrawals. THIS is a rather long article over at Zero Hedge explaining the proposed new rules. ZH was kind enough to highlight the important parts in bold.

Here is the most important part:

Rule 22e-3

From the SEC:

Proposed rule 22e–3(a) would permit a money market fund to suspend redemptions if:

(i) The fund’s current price per share, calculated pursuant to rule 2a–7(c), is less than the fund’s stable net asset value per share;

(ii) its board of directors, including a majority of directors who are not interested persons, approves the liquidation of the fund; and

(iii) the fund, prior to suspending redemptions, notifies the Commission of its decision to liquidate and suspend redemptions, by electronic mail directed to the attention of our Director of the Division of Investment Management or the Director’s designee.

The bottom line is that the proposed rule change will allow institutions to halt redemptions from money market funds under certain conditions.

I have two views on this:

Yes, a panic is bad, and yes massive withdrawals from funds are profoundly destabilizing for the overall financial system. Because money market funds are not FDIC-insured, they are certainly likely to be prone to runs. It happened in November of 2008 after Lehman failed.

On the other side of the argument:

i)The money in question is MY money, not theirs.

ii) Since it is in a "liquid" account, I should be able to access all of MY money at any time.

iii) The last guy who needed to halt fund redemptions was Bernie Madoff.

I am still trying to decide whether or not this is a feature or a bug in the plan. The effect will be to coerce Americans to put their cash into the stock/bond markets, if only to guarantee access to their money. Of course a by-product of this rule will be that the financial industry benefits, and the stock market goes up. However forced purchase of stocks is not organic stock market behavior. It's manipulation.

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