The Money Market Managers Unleashed–An End to the Road to Redemption

Last week, SurvivalBlog reader Noah C. sent me a link to piece by Dan Denninger: SEC Tightens Rules for Money Funds. Noah made this comment that amplified Denninger’s observations: “Here is the most interesting part: That a Money Market Fund’s Board of Directors can now ‘inform’ the SEC (instead of request) that they are suspending fund redemptions.” I also heard from our friend Darrin in Wyoming about same topic. He wrote: “A Wall Street Journal report mentioned that the SEC voted Wednesday (1/27/10) to allow money market fund managers to freeze redemptions, in an effort to ‘make your investments more safe'”. This is the closing sentence from the WSJ article:

“These and other changes will provide significant additional protections and will benefit money market fund investors.”

Ahem, but I don’t feel any safer, knowing that my money market accounts could be “temporarily unavailable” when the net asset value (NAV) drops below $1/ per share. (They call that “breaking the buck.”) This change echoes something that I’ve been warning about since 2006 over in the hedge fund world. (See; Hedge Funds–A Disaster Story that Could Unfold in Quarterly Episodes.) There, they’ve already had the ability to suspend redemptions, at will. Seeing a comparable rule implemented for Money Market funds is very troubling. I thought that in the wake of the big credit market meltdown, that government control of the financial markets was going to increase. This new rule is something quite the opposite.

Let’s face it: The SEC has a high population of staffers that formerly worked in the same industry that they are now regulating. The “foxes guarding the henhouse” metaphor comes to mind. And to see folks like Tim Geithner and Ben Bernanke–both formerly banking industry insiders–now placed in the highest levels of oversight really makes me wonder: In who’s best interest are they governing? And, more importantly, from a preparedness perspective: What circumstances are they envisioning for the future that would make this rule change necessary? Why do they need to empower fund managers with a giant “OFF” switch, that can be thrown at a moment’s notice? Buckle up, folks. There is a bumpy ride ahead.