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

[Martinghoul]

Quote from Ed Breen:
I don't think I am missing the point...because I think the issue effects me directly. I am responsible for a close corp manufaturing business that has operating cash flows in excess of FDIC deposit insurance. After the Reserve MMF broke the buck I immediatleyh directed the CFO to put uninsured funds in short term Treasuries or a TBill fund, moving the funds out of MMFs. After the Fed propped up the MMFs and increased the insured deposti amount we have returned to allow some overnight funds to remain uninsured. We buy CD's in various banks to stay insured on surplus cash. Operating funds do flow into MMFs but when they reach a certain point we sweep them out. If the proposed changes are implemented to withhold deposit withdrawals of 5% for 30 days or to charge up front feed for deposit in MMFs then we will not use them. There is no yield, so their is no incentive to pay for the short term deposit. We would instead put the funds in a TBill account or fund. It is obvious to me that such costs on the depositor to MMF would cause a huge run off in MMF funds.

On the other side I fully understand that with short term rates so low, there is no margin for the MMF sponsors to make a profit. The isse will get worse when volumes contract. With the prospect that short term rates will be low, as Fed policy, for the next two years at least...I simply don't see how the SEC changes can do anything but casue a severe contraction of the industry.

On the other hand, such move would drive short term funds to TBills and operate to keep TBill rates low...maybe that is what they want.

OKI, fine, but I am not really sure what this has to do with the point I am making. I am suggesting that the MMF industry, the way it is currently designed, deserves to contract severely. I really don't get why the SEC proposal, the main point of which is to force MMFs to mark-to-market, is so revolutionary. I thought mark-to-market is generally considered to be a good thing?

As to low t-bill yields, I don't think "they" need to exert themselves to make yields lower. The mkt takes care of that just fine.

 

[Ed Breen]

I understand that you think the IMF industry should contract. I get that you gave that opinion several times in the thread...what is missing is any detailed discussion or why and what the likely consequences would be. I don't think you back up you reasoning very well...your opinions seem to be offered in a conclusory fashion without sharing your analysis of facts and your reasoning about facts. So, I understand your opinion, but I must discount it because I veiw it as conclusory; stated differently, you have done nothing to convince me that you opinion is correct.

A place to put money overnight or for a short period of time is fundamental to the global financial system. It is fundamental to doing real business and trade. It will be more difficult to do business without a functioning money market. The contraction or the failure of that market to funcion will be an increase cost, an inefficiency, on all business and trade.

The pull out by U.S. MMFs from the EU bond market is what caused the dollar shortage in Europe that required the Multi CB currency swap deal. You are cavalier to simply suggest the MMFs 'deserve' to contract, and not consider the consequences of such a contraction.

 

[Martinghoul]

Quote from Ed Breen:
I understand that you think the IMF industry should contract. I get that you gave that opinion several times in the thread...what is missing is any detailed discussion or why and what the likely consequences would be. I don't think you back up you reasoning very well...your opinions seem to be offered in a conclusory fashion without sharing your analysis of facts and your reasoning about facts. So, I understand your opinion, but I must discount it because I veiw it as conclusory; stated differently, you have done nothing to convince me that you opinion is correct.

A place to put money overnight or for a short period of time is fundamental to the global financial system. It is fundamental to doing real business and trade. It will be more difficult to do business without a functioning money market. The contraction or the failure of that market to funcion will be an increase cost, an inefficiency, on all business and trade.

The pull out by U.S. MMFs from the EU bond market is what caused the dollar shortage in Europe that required the Multi CB currency swap deal. You are cavalier to simply suggest the MMFs 'deserve' to contract, and not consider the consequences of such a contraction.

Huh? How many times now have I provided specific and detailed arguments for why the MMF industry, the way it exists now, should contract? I have offered analysis and reasoning. How many more times should I do it? What precisely is the flaw in the reasoning that I have given which makes it somehow not convincing?

As to the dire consequences of the contraction, what, pray tell, might those be?

And yes, a place to put money overnight is fundamental, which is precisely the reason to make the vehicles for this money sound and transparent. That is what I (and it appears, the SEC) am arguing for. Nobody is suggesting some sort of a blanket prohibition of all money mkt activity or trading. What is being suggested is a way to make a particulary weak part of the current system more transparent and less susceptible to runs. And yes, there's a price associated with it, but it's a price well worth paying (similar in nature to the FDIC levy).

Regarding the swap lines, you're incorrect. The CB swap lines weren't put in place because the US MMFs stopped funding EU banks. Have you seen the actual usage of those swaps? The only reason these facilities were put in place was to prevent a panic during the end of 2011, when Dexia, a single, extremely large and dysfunctional institution, had to be unwound.

Finally, you haven't actually read what I have written carefully enough. What I said was that "the MMF industry, the way it is designed at the moment, should contract". I have no problem whatsoever with it, once obvious and sensible changes are implemented.

 

[the1]

Without going into a long discourse on the topic contraction of the banking system where there are only 5 major players can only be a bad thing as it will create a monopoly/oligopoly in the industry run by a small group of powerful men with a profit seeking agenda at the expense of the population of the country. That, in my opinion, would be inherently bad for the country.

Quote from Martinghoul:

Huh? How many times now have I provided specific and detailed arguments for why the MMF industry, the way it exists now, should contract? I have offered analysis and reasoning. How many more times should I do it? What precisely is the flaw in the reasoning that I have given which makes it somehow not convincing?

As to the dire consequences of the contraction, what, pray tell, might those be?

And yes, a place to put money overnight is fundamental, which is precisely the reason to make the vehicles for this money sound and transparent. That is what I (and it appears, the SEC) am arguing for. Nobody is suggesting some sort of a blanket prohibition of all money mkt activity or trading. What is being suggested is a way to make a particulary weak part of the current system more transparent and less susceptible to runs. And yes, there's a price associated with it, but it's a price well worth paying (similar in nature to the FDIC levy).

Regarding the swap lines, you're incorrect. The CB swap lines weren't put in place because the US MMFs stopped funding EU banks. Have you seen the actual usage of those swaps? The only reason these facilities were put in place was to prevent a panic during the end of 2011, when Dexia, a single, extremely large and dysfunctional institution, had to be unwound.

Finally, you haven't actually read what I have written carefully enough. What I said was that "the MMF industry, the way it is designed at the moment, should contract". I have no problem whatsoever with it, once obvious and sensible changes are implemented.

 

[trefoil]

Quote from Martinghoul:

Huh? So I guess mark-to-market doesn't matter then? How can I get a deal like that for my trades? Moreover, what about the fact that the MMFs had to be bailed out by their parent co's?

At any rate, I can't make you see what you don't want to see. I was directly involved in the money mkts during the really painful moments of 07/08. All I can tell you is that I don't want to see MMFs causing the issues they caused back then ever again.

Two things I need some detail on here:

1 - I've looked up the Canadian situation, and can't find any info on how that was wound up, all the info is on why the crisis happened. Some details on that would be appreciated.
2 - What else happened in 2007 and 8 with MMFs? I don't remember them being any sort of problem before the Reserve Fund blowup. That was in late 08, so your reference to 07 and 08 must mean lots of other stuff was going on prior that I don't know about.

Also, I have no problem at all with them being made to mark to market. In normal times, that would be a very trivial exercise, I would imagine. Risk in a fund I always thought could be figured out - relative to other funds - by their average maturity and their rate, with lower figures on both indicating more safety. But if marking to market helps the cause, I don't see a reason to object.

 

[Martinghoul]

Quote from trefoil:
Two things I need some detail on here:

1 - I've looked up the Canadian situation, and can't find any info on how that was wound up, all the info is on why the crisis happened. Some details on that would be appreciated.
2 - What else happened in 2007 and 8 with MMFs? I don't remember them being any sort of problem before the Reserve Fund blowup. That was in late 08, so your reference to 07 and 08 must mean lots of other stuff was going on prior that I don't know about.

- The Canadian situation was all about a bunch of ABCP conduits. If memory serves, it ended pretty much the same way most other SIV/conduit debacles eventually ended. Specifically, the sponsoring banks ended up taking parts of them onto their balance sheets. Other parts were restructured and unwound.
- Throughout 07 and 08 nothing overt happened to the MMFs, but the pressure was building. Stuff was occurring that had implications on MMF business. Specifically, fluctuations in the repo, FF and unsecured depo mkts, meant that everything the MMFs did became increasingly uncertain and erratic. Add to that the ongoing SIV issues and the various attempts to fix that mkt which was mainly funded by the MMFs (nobody now remembers the M-LEC, but there was a moment when it was the great white hope). Whole point is that, like every other aspect of the crisis, the MMF issues that culminated after Leh in Sep 2008 had been brewing for a while.

Also, I have no problem at all with them being made to mark to market. In normal times, that would be a very trivial exercise, I would imagine. Risk in a fund I always thought could be figured out - relative to other funds - by their average maturity and their rate, with lower figures on both indicating more safety. But if marking to market helps the cause, I don't see a reason to object.

Precisely! I have absolutely no problem with the MMFs if they're transparent and don't have this absurd fetish with $1 NAV. Given they invest in extremely liquid, short-term paper, I just see absolutely zero reason to avoid marking their assets to mkt. I also see no problem with them being mandated to hold a certain amount of capital in cash to be able to meet redemptions. If that happens, I would probably be happy to put some of my own money there.

 

[trefoil]

Thanks for the info.
Thinking about it, I forgot to remember my greatest regret of the whole crisis: shortly after the Bear Stearns hedge fund blowup in 07, the treasurer of the bank where I was working at the time gave a presentation in which he said that suddenly the balance sheet was heavy with short term stuff, to a far greater extent than he would like to see. I remember hearing that and a little light bulb popping on in my head and thinking to myself "so this crisis is for real." I never did anything about that little light bulb in my head though. Dumb.

 

[Martinghoul]

Quote from trefoil:
Thanks for the info.
Thinking about it, I forgot to remember my greatest regret of the whole crisis: shortly after the Bear Stearns hedge fund blowup in 07, the treasurer of the bank where I was working at the time gave a presentation in which he said that suddenly the balance sheet was heavy with short term stuff, to a far greater extent than he would like to see. I remember hearing that and a little light bulb popping on in my head and thinking to myself "so this crisis is for real." I never did anything about that little light bulb in my head though. Dumb.

Trust me, you're not alone in this... In hindsight, so many things look obvious to me now, it's beyond funny. But connecting the dots, while you're in the middle of it, is really very very difficult.

 

[Martinghoul]

And, looky here, isn't this an amazing coincidence? An article in the WSJ on the subject (you can probably access the full text through Google)...

http://online.wsj.com/article/SB10001424052970203824904577213261643737968.html

 

[Ed Breen]

Mghoul, I re read all your posts in this thread and the the threads you cited to where you made comments on MMFs. I also read the WSJ journal article that supported the proposed changes being pushed by Mary Shapiro. I will give you credit that you did outline a criticism of MMFs based on a lack of lack of liquidity flowing from a mis match of investments that are not transparent, a general belief that sponsers seek to promote that the funds are guarateed and a concentration of the industry. My first reading was a skim and I missed some of your comments mixed in with the annoying metacoversation.

I guess I did not realize that so many people think the funds are guaranteed. As a person who uses the funds, I never suffered that confusion and when the crises was most accute I worried about those funds and moved money in response to that vunerability. I do not think the Gov't should be in the position of having to tacitly or expressly guarantee those funds. I guess that you and I would agree on that. On reflection, I think transparency of the fund assets and values with accurate market valuations is proper and necessary.

I am not so shure however that with all interest rates on all maner of paper compressing to zero, that such uninsured funds will find a sustaining market. It seems this situation is the consequence of an evolution of banking where government has been relied on as the insurer and there is no longer a premium for banks to build brick house balance sheets to attract thier clients. I know that I would not be interested in MMF's if I had to pay an upfront fee or agree to leave a portion of funds on deposit for a period after withdrawal. I think I would put moeny somewhere else...perhaps with a super solvent bank where I thought I understood their balance sheet. Problem with that is that banks already have more cash, short term deposits than they know what to do with...and with FDIC insurance premiums they do not make much money in laying off those deposit in excess reserves or any other matched investment.