By James Saft
(Reuters) – New money market fund reforms are half measures which will fail to end investors’ illusion that there is such a thing as a safe asset.
The Securities and Exchange Commission on Wednesday adopted new rules aimed at forestalling runs on money market funds, notably one which will force ‘prime’ institutional funds to allow their value to float. The new rules also allow all money market funds finding themselves short of liquid assets in stressed markets to impose temporary impediments to redemptions or charge fees of up to 2 percent. Both sets of rules take effect in two years’ time.
The rules fall ruefully short in that they exclude retail money market funds, which will continue to be allowed to indulge in the polite fiction that their value is stable at a dollar per share.
The dollar per share convention has unmoored investors, institutional and retail, from the relationship between risk and reward. The real value of all assets fluctuates, and the only nominal values which can remain truly stable are those of securities issued or insured by someone with the right to print money. Those facts may raise the cost of doing business and raise the cost of credit, but they remain facts nonetheless.
Policies, like the SEC’s, which attempt to finesse these facts will either fail disastrously or end with the government picking up the tab for private speculation.