The first time we wrote about the Volcker-led Group of 30 recommendation to crush Money Markets in January 2010 by effectively imposing capital controls and fund “gates”, whose purpose was simply to scare investors out of the $2.6 trillion liquidity pool and force said capital to reallocate into a much more “reflation friendly” asset classes such as stocks, many were concerned but few took it seriously. After all, such a coercive push into a “free” market at the time seemed incomprehensible (if, in reality, turned out to be just a few years ahead of its time).
Fast forward two years to July 2012 when the same proposal of “risk-mitigation” by allocating a portion of the balance to a “loss-absorption fund”, which would “create a disincentive to redeem if the fund is likely to have losses” was not only re-espoused by Tim Geithner, and the NY Fed but the SEC put it to a vote and the proposal would have almost passed had it no been for a nay vote by Commissioner Luis Aguilar opposing Mary Schapiro in the last minute. Still, once more many largely unconcerned about the implications behind this urgent push to intervene and establish pseudo-capital controls in this major source of potential stock buying “dry powder.”
A few months later, following the coercive bail-in of Cypriot deposits, and the new “blueprint” for Europe bank rescues, whereby the authorities have strongly hinted that no more than the insured limit should be kept as as a deposit at a bank and it is preferred that the balance is invested in stocks or some other ponzi-enabling instrument, many have finally started to wonder if indeed there isn’t some overarching strategy to “tax” financial assets in a world slowly but surely going insolvent and where the much desired debt inflation is so slow to materialize (just as we predicted would happen in September of 2011 in The “Muddle Through” Has Failed: BCG Says “There May Be Only Painful Ways Out Of The Crisis“).
Today, with a brand new leader, Mary Jo White, now that the clueless and co-opted Mary Schapiro is long gone, the $2.6 trillion Money Market Fund industry is one step closer to finally being gated. But don’t it call it that – the SEC prefers the term “protecting investors”
A portion of the $2.6 trillion money market fund industry would be required to fundamentally change how it prices its shares in an effort to reduce the risk of abrupt withdrawals, under a proposal released by U.S. regulators on Wednesday.
Funds could also charge withdrawal fees and delay return of funds to customers in times of financial distress, under the Securities and Exchange Commission’s proposal.
The SEC plan comes after a long debate over whether changes made in 2010 were enough to avoid a repeat of a run on money market funds seen at the height of the financial crisis.
Naturally, those who see the writing on the wall – the MMF industry – is not happy:
The fund industry has warned that further major reforms could kill investor interest in money market funds.
Well, of course. After all this is the whole point. Recall what we said in July of 2012:
In a nutshell, money market funds (much more on this below), have always been one of the most hated liquidity intermediaries by the central planners: they don’t go into stocks, they don’t go into bonds, they just sit there, collecting no interest, but more importantly, are inert, and can not be incorporated into the rehypothecation architecture of shadow banking.
And perhaps that is precisely why the Fed is pulling the scab off an old sore. Recall that for the past year, our primary contention has been that the core reason for all developed world problems is the gradual disappearance of good collateral and money good assets.
Even if the MMF cash were to shift, preemptively, into bonds, or any other “safe” investments, the assets backing the cash can them enter the traditional-shadow liquidity system and buy time: the only real goal at this point. In the process, the cash itself would be “securitized” and provide at least a year or so in additional breathing room for a system that has essentially run out of good liquidity, and in Europe, out of any collateral.
Expect more and more efforts to disgorge the $2.7 trillion in money market funds as the world gets closer and closer to D-Day. And what happens with MMF, will then progress to all other real asset classes as the government truly spreads out its capital controls wings.
Funny: we said this 9 months before a capital control “disgorgement” struck in Cyprus. Fear not: it is coming to every other “taxable” financial asset. But whereas we thought the money market forced capital expropriation would be first, some places like Europe were so desperate they couldn’t afford to wait that long.
So what proposals is the SEC planning on applying in order to enforce the capital reallocation pardon avoid investor losses? There are two, both perfect strawmen, and have been well-known since the first time we approached this topic three and a half years ago.
In a compromise move, the SEC’s plan mostly focuses on prime funds for institutional investors, which are seen as more prone to runs because those investors are more sophisticated and more likely to pull large blocks of money first if there is a panic.
The SEC estimated that institutional funds represent 37 percent of the market with $1 trillion in assets.
The SEC’s plan calls for two alternative proposals that it said could be adopted alone or in combination.
The first piece would require prime funds used by institutional investors to transition from a stable, $1 per share, to a floating net asset value (NAV) – a move designed to reduce the risk of runs like those during the financial crisis.
The SEC said that retail and government funds, which are not considered to be at the same risk for runs, would not have to move to a floating NAV. Retail funds are defined as those that limit shareholder redemptions to $1 million per day.
The industry has long fought against moving away from a stable share price, which it says is appealing to investors looking for a safe product.
The second proposal, meanwhile, would give fund boards for institutional and retail funds the authority to impose so-called “liquidity fees and redemption gates” during times of stress.
That would give funds the power to stop an outflow of investor money, an idea that the SEC’s two Republican commissioners last year said they might be able to support.
We are not sure what is more amusing: that the SEC is so naive it thinks someone will actually believe it can prevent a capital run in a financial panic, or that its transparent attempt to spook money market investors away from their holdings now that the threat of imminent lock ups and gates looms over their heads is not what this is all about. We anticipate that the SEC will drop numerous analogies to Cyprus as a reminder that if something can be gated, it will be gated.
What is more important, is that unlike Schapiro’s plan the current SEC proposal should have no difficulty in passing.
The initial industry reaction on Wednesday indicated the SEC’s plan may not generate the same degree of opposition that the SEC faced last summer when then-SEC Chair Mary Schapiro called for what some consider stricter reforms.
Schapiro, who stepped down as SEC head last December, had advocated for a series of possible reforms, including capital buffers and redemption holdbacks, or a broader switch to a floating NAV – two ideas vehemently opposed by the industry.
She was unable to muster the votes needed to issue a proposal for comment after three of her fellow commissioners said they could not support her plan without additional study.
Schapiro’s proposal was starkly different from what the SEC unveiled on Wednesday. This time, the SEC’s plan contains some proposals that a few fund sponsors have previously said they could live with.
“It has been a journey to get to this point,” said SEC Chair Mary Jo White, who took over the agency earlier this spring.
And if the industry is onboard, all the token SEC votes needed to enforce the plan will be in place.
At that point money markets will merely be the latest experiment in behavioral control: how to spook those with money in the multi-trillion industry enough to where they pull their cash and either spend it on trinkets, boosting inflation – a very welcome outcome for the Chairman – or merely investing it in the “stock market.” Perhaps instead of a lock up, at times of crisis MMF investors will be given the opion of allocating funds to the Solyndra du jour (a la the Cyprus bank bailout) or lose all the money.
We are confident the central planners will find a way,