November 13, 2012
Several weeks ago, I asked that this council to address the structural weaknesses that make money market mutual funds susceptible to devastating runs - runs that we know are not just theoretical possibilities. Shortly thereafter, Secretary Geithner responded by issuing a letter setting out a series of steps the Council should consider. Today, I am very pleased that that my colleagues are taking this important action that can ultimately help to protect not only investors and taxpayers, but the financial system as well.
Today's action means that meaningful structural reform options - from floating the net asset value so that money market fund prices accurately reflect the value of the underlying portfolio, to alternative approaches including capital solutions -- can be published and allow us to benefit from the public's input.
As regulators here and around the world clearly remember, in the fall of 2008, after the Reserve Primary Fund broke the buck, there was a broad-based run on prime money market funds. And it all happened in a matter of days. That run exacerbated strains in the short-term credit markets, panicked money market fund investors and sharply reduced short-term funding for American corporations and municipalities. These added pressures were the last thing needed in a financial system already reeling.
At the time, there was no formal council of regulators tasked with searching for risks that could cascade throughout the financial system and harm our economy. But, today, with the creation of the Financial Stability Oversight Council, we are jointly committed to taking the actions necessary – and making the tough calls required - to avoid the type of financial collapse that this nation experienced in the fall of 2008.
The run on prime money market funds undoubtedly was a core part of that financial crisis. Yet the run abated only after unprecedented federal government intervention -- in the form of the taxpayer funded Treasury Guarantee program, as well as the liquidity facilities established by the Federal Reserve Board.
As regulators focused on financial stability, we owe it to all Americans to take appropriate steps to prevent our financial system and the nation's taxpayers from again finding themselves in the same precarious position.
That is why it is important to put forward concrete reform options to address money market funds' susceptibility to runs. The council is putting forward three proposed recommendations: a floating net asset value option so that money market funds would reflect their market-to-market value like every other mutual fund; and two options that rely on various levels of stand-by capital protections combined with other measures to strengthen money market fund portfolios and disincentivize runs.
I personally believe floating NAV is the pure option; the simplest option; and the option that is most consistent with the SEC's regulatory approach to investment products. It provides clarity of value and enables investors to enjoy gains and share in losses as appropriate in a pooled investment. On the other hand, I recognize that money market fund investors value a stable NAV product. That is why I am open to feedback on options that might enable money market funds to maintain a stable NAV -- but with additional structural protections to enable absorption of losses and to disincentivize investors from panicked redemptions.
The public dialogue that inevitably will follow publication of these proposed reform options will be extremely valuable. It will facilitate the effective crafting of solutions to better enable these funds to absorb losses without generating a run. And it will enable policymakers to critically consider tools that may diminish incentives for investors to rush in and pull all of their money at the first sign of a problem - leaving slower moving, likely retail, investors behind to suffer the losses.
I look forward to the public input and I am thankful for the seriousness and dedication that Secretary Geithner and the Council have brought to bear in crafting these proposed reforms. As the Council notes in its request for public input, the SEC by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risks that money market mutual funds present. As a result, it is important to note that if the SEC moves forward with meaningful structural reforms of money market mutual funds, the Council would not issue a final money market fund reform recommendation to the Commission.
Finally, I would like to thank the staff of the FSOC member agencies who have brought their combined expertise and effort to bear in preparing the document before us today. It represents a critical step in addressing one of the key pieces of unfinished business from the financial crisis.
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