US government looking to control credit by reduciing system to 5 large banks

[zdreg]

Quote from Martinghoul:

Here's a couple:
http://www.elitetrader.com/vb/showthread.php?s=&postid=3131050&highlight=money+mkt+fund#post3131050
http://www.elitetrader.com/vb/showthread.php?s=&postid=2328002&highlight=money+mkt+fund#post2328002

I am happy to expand if need be.

That is NOT what the gov't is proposing. You have to be more careful, as I have mentioned before.

I never said I am the center of the universe. I just don't react well to threats, even of a mild and gentle sort.

wrong again. the gov't is proposing withholding of 3% for a month.
"The industry and several SEC commissioners have questioned whether any further changes are required.

One of the new plans, favored by some SEC staff and banking regulators, would consist of both a capital buffer requirement and a 30-day hold-back on redemption requests by investors.

Under that proposal, funds would need to maintain a 1 percent capital cushion and they would hold back 3 percent of investor funds for 30 days after a redemption request."

http://www.reuters.com/article/2012/02/07/sec-moneymarketfunds-idUSL4E8D769N20120207

if there should be a run on the $US that percentage would skyrocket. it is the usual camel's nose under the door scenario.

 

[ElectricSavant]

zdreg and Martinghoul...

Thank you both for this thread and your infomative posts.

I am not as informed as you...but I did vote in the poll.

ES

 

[Martinghoul]

Quote from zdreg:
wrong again. the gov't is proposing withholding of 3% for a month.
"The industry and several SEC commissioners have questioned whether any further changes are required.

One of the new plans, favored by some SEC staff and banking regulators, would consist of both a capital buffer requirement and a 30-day hold-back on redemption requests by investors.

Under that proposal, funds would need to maintain a 1 percent capital cushion and they would hold back 3 percent of investor funds for 30 days after a redemption request."

http://www.reuters.com/article/2012/02/07/sec-moneymarketfunds-idUSL4E8D769N20120207

if there should be a run on the $US that percentage would skyrocket. it is the usual camel's nose under the door scenario.

Huh? Wrong again? There's a difference between not getting your money back (which is what you claimed earlier) and a 1 month lockup.

I still think you don't understand. Do you think the money fund you're invested in is actually capable of instant redemptions under all mkt conditions? Do you imagine you're getting some sort of a liquidity arb, where these money funds are able to magically offer you a yield pickup while being invested in super liquid stuff like t-bills or UST repo? You need to think again. Otherwise, you may end up like one of Phil Falcone's investors. As I keep saying, there's a very large ($1.6trn, which is smaller than it used to be) liquidity mismatch in the US financial system. That is an issue that needs to be addressed and the new rules are designed to address it. Otherwise, you will have the Fed backstopping the entire system in the interest of stability (remember MMIFF?). Is that what you desire?

 

[Martinghoul]

Quote from zdreg:
"Huh? Wrong again? There's a difference between not getting your money back (which is what you claimed earlier) and a 1 month lockup."

you read an assumption into my original remark.

No, I didn't... You may have edited your post, while I was typing my response. That might be the source of the issue. I was responding to this, which is what you typed originally:

"secondly, the bottom line is that what gov't is proposing that u don't get back 3% of your money is just the beginning of capital controls."

If I have caught you mid edit and you didn't mean the above, I apologize.

 

[zdreg]

Quote from Martinghoul:

No, I didn't... You may have edited your post, while I was typing my response. That might be the source of the issue. I was responding to this, which is what you typed originally:

If I have caught you mid edit and you didn't mean the above, I apologize. [/QUO y

" gov't is proposing that u don't get back 3% of your money"
without the words for 30 days at the end of the sentence it is possible to make a hurried and incorrect judgement to its meaning.

 

[trefoil]

Quote from Martinghoul:

Yes, but then you're barking up the wrong tree... The money mkt fund industry is quite concentrated and already presents a massive systemic risk (as evidenced by the events of 2008). So if you want to do something about the dominoes, money funds offer as good a place to start as any.

Is the risk in money mkts any diff than the risk in putting your money in the bank? Absent the FDIC and such, money in a bank is subject to far more of a liquidity mismatch than money in a money market fund, no?

 

[Martinghoul]

Quote from trefoil:
Is the risk in money mkts any diff than the risk in putting your money in the bank? Absent the FDIC and such, money in a bank is subject to far more of a liquidity mismatch than money in a money market fund, no?

It's somewhat different, but you do have a point. FDIC DIF exists precisely for this reason (to prevent depositor runs).

But it's actually not even about that. What matters is the fact that, as a retail bank depositor, you're well aware (or, if not, you should be) that your deposit is only "guaranteed" up to the FDIC coverage limit. After that, even though you're the bank's most senior creditor, you know that you might not get your money back. While in reality this is even more the case for money mkt funds, due to the combination of amortised cost accounting and the whole "implicit" $1 NAV floor, it's not how MMF investors have seen it. 2008, with the whole debacle of the Reserve Primary breaking a buck, was a time of rude awakening for a whole bunch of people, with all the systemic implications thereof.

So that is why I welcome regulation that a) removes the need for the Fed backstop of the MMF industry; b) makes the risk of investing w/MMFs explicit and clear to investors by allowing the NAV to float and introducing clear lockups; c) makes the MMFs more prudent about having capital in place to meet potential redemptions. Obviously, the fund executives will whine and cry foul and lobby against anything that makes their business model more costly (see the article in WSJ recently), but, in this particular case, their business model has been a scam for a good long time and they will get no sympathy from me.

 

[zdreg]

investors in money market funds are warned that their funds are not fdic insured. they are supposed to read the prospectus. it is greed,searching for higher yield, which leads to eventual financial grief.

were are your facts that the money market fund industry is a concentrated industry?

without a backstop how much would have the shareholders of reserve fund have lost?

 

[Martinghoul]

Quote from zdreg:
investors in money market funds are warned that their funds are not fdic insured. they are supposed to read the prospectus. it is greed,searching for higher yield, which leads to eventual financial grief.

were are your facts that the money market fund industry is a concentrated industry?

without a backstop how much would have the shareholders of reserve fund have lost?

That's my point. MMF investors have been led to believe that the $1 NAV floor is some sort of an inviolate rule that has been imposed by Holy Writ. That is entirely the fault of the industry, which has seen its assets swell as a result of promising things they know they realistically may not be able to deliver. So yes, sure, part of the blame rests with idiot investors, but false advertising is nothing to sneeze at. Moreover, the MMF industry has been somehow able to do all this, while being able to avoid the rigors of mark-to-mkt.

My facts regarding the concentration of the MMF industry come from some research I did back in 2007 on the state of affairs in the funding mkts. It was based on ICI data that you can obtain if you pay for it. If you'd like me to, I can dig stuff up, although it's been a very long time.

Well, according to what I have read Reserve Primary held arnd $785mil of Lehman paper (I presume it was mostly CP). They had to write this down to 0. The actual losses the investors would have suffered may have been smaller or larger than that, depending on whether the paper was purchased below, at or above par.

 

[pythontrader]

Quote from Martinghoul:

That's my point. MMF investors have been led to believe that the $1 NAV floor is some sort of an inviolate rule that has been imposed by Holy Writ. That is entirely the fault of the industry, which has seen its assets swell as a result of promising things they know they realistically may not be able to deliver. So yes, sure, part of the blame rests with idiot investors, but false advertising is nothing to sneeze at. Moreover, the MMF industry has been somehow able to do all this, while being able to avoid the rigors of mark-to-mkt.

My facts regarding the concentration of the MMF industry come from some research I did back in 2007 on the state of affairs in the funding mkts. It was based on ICI data that you can obtain if you pay for it. If you'd like me to, I can dig stuff up, although it's been a very long time.

Well, according to what I have read Reserve Primary held arnd $785mil of Lehman paper (I presume it was mostly CP). They had to write this down to 0. The actual losses the investors would have suffered may have been smaller or larger than that, depending on whether the paper was purchased below, at or above par.

So in other words, you are not a trader. What are you wasting your time for?