Posted by Karl Denninger
Here’s something you won’t see talked about much – unless you dig for it.
Zerohedge covered it – the fact that money markets are no longer guaranteed liquid. But look at what The Wall Street Journal had to say:
Money-market funds could be forced to pay out less interest under new federal rules designed to make them sturdier.
With memories still raw from the 2008 meltdown of Reserve Primary Fund, the Securities and Exchange Commission released rules on Wednesday that require funds to hold more liquid and higher-quality assets and disclose the value of their assets per share more frequently.
This makes it sound as though the funds will be safer – and more liquid – right? That is, there will be less risk of what happened when Reserve broke the buck and then threw up gates.
Funds must be able to sell 10 percent of their assets in one day and 30 percent within a week under rules approved today by the Securities and Exchange Commission. The SEC’s 4-1 vote also imposed new restrictions on buying lower-rated securities and required more disclosure on declines in funds’ share prices.
“These rules will take important initial steps toward making money-market funds less vulnerable to runs,” SEC Chairman Mary Schapiro said at a meeting in Washington. “The new rules will have substantial benefits for investors.”
Less vulnerable to runs, eh? That’s a rather nuanced statement that at first sounds like “less likely for you to get stuck without access to your money”, right?
Well, don’t be so sure. Buried in there is this:
Suspension of Redemptions: The new rules permit a money market fund’s board of directors to suspend redemptions if the fund is about to break the buck and decides to liquidate the fund (currently the board must request an order from the SEC to suspend redemptions). In the event of a threatened run on the fund, this allows for an orderly liquidation of the portfolio. The fund is now required to notify the Commission prior to relying on this rule.
Formerly the fund had to seek permission to suspend redemptions.
Not any more. Now the fund’s board is empowered to do so unilaterally and advise the SEC, as opposed to asking the SEC for permission to toss up the gates.
This is not a small difference folks. Indeed, it is a major problem. You could easily find your so-called “safe” money market fund gated and you unable to get to your money until the fund liquidates – without warning.
So yeah, the funds are now “less vulnerable to runs” as if there’s a problem they can immediately bar the door and keep you from leaving with your cash!
That’s not quite what you thought that paragraph said, is it?
Many people treat these funds as if they were equivalent to a checking account. Some of the funds will even send you a book of checks!
Investors no longer can reasonably rely on daily liquidity for these funds as a consequence of this change. While under normal conditions daily liquidity remains available it is precisely under abnormal conditions that an investor is likely to most need access to this money instantly, for example to meet a margin call or for other emergency funding requirements.
The inversion of the former rules in this regard means you can no longer treat these as cash equivalents with a higher yield. Indeed, there is damn little reason for anyone to buy these at all now – you’re really not any better (or worse) off if you simply deposit the money in Treasury Direct and then buy a ladder of short-term bills – say, 4 or 13-week instruments.
Yes, you’ll earn jack doing this. But you’re going to earn jack anyway in a money market fund, you won’t pay a management fee with a Treasury Direct account, and at least thus far there is no material threat of the US Federal Government throwing up gates.
Inexorably the noose tightens around your neck. Beware.