Paul Volcker wants to kill money market funds. He says that investors don’t understand them and that the funds could crash the financial system. He’s right.
The root of the problem is that money market funds are sold as “cash equivalents,” when really they’re anything but.
Investors allocating a percentage of their assets to “cash” are typically looking for a “riskless” place to park money. They want their principal protected, but they would also like a few extra points of interest thank you very much. Free checks ? Even better.
Money market funds can offer all of the above, so naturally investors gravitate to them.
What they don’t realize is that their principal is at risk. The $1 net asset value that money funds market is just an accounting gimmick, a milder version of the same gimmick banks use to avoid writing down bad loans.