Imagine If ATMs Told You They Will Not Give You Cash for 10 Days

Stephen Foley at FT comments (my emphasis) on the new "crisis-time" restrictions available to MMF managers:

It is irritating enough here in the US to have to pay $2 or more to get money out of a cash machine, if there happens not to be a bank branch handy. Imagine if the machine also told you it will not give you the cash for 10 days.

These aggravations – fees and withdrawal restrictions – will soon be threatened by money market mutual funds, which millions of American investors use as a kind of higher interest-bearing savings account...

Last week, the Securities and Exchange Commission approved a slew of new rules covering the $2.6tn MMF industry. After years of controversy and intense lobbying, it was surprising that fund managers reacted with statements of broad support. One potential explanation for the outbreak of peace is that asset managers view the SEC’s decision as advancing a broader agenda, namely to win more discretion for managers over when and how their investors are allowed to pull money out of funds.

The SEC’s thinking will inform forthcoming debates about how to limit systemic risk and prevent runs across the fund management industry. The conclusion it came to in this case might actually have made runs more likely, not less.

Under the new rules, MMFs that hold corporate or municipal government debt will be allowed to charge a fee for withdrawals or even halt them altogether by putting up gates for up to 10 days, should market liquidity dry up or the fund get into trouble...

Giving fund managers discretion to halt redemptions is superficially attractive, especially given the fiduciary duty to protect investors in their funds.

The trouble is that many investors cannot countenance the risk of losing access to their money, and nor should they. It is as frightening an idea to them as the cash machines stopping working.

What will happen? As market stress rises, it becomes more likely that a fund will erect gates, and the incentive to get out kicks in even earlier. This was a warning made by Federal Reserve governors to the SEC last year, which has been ignored.

We may ultimately find that the SEC has increased rather than decreased systemic risk and, more worryingly, opened the intellectual door to further moves in this wrong-headed direction.

I warn once again, there is simply no advantage to keeping funds in a money market fund, at this time, versus at an elitist, establishment bank account. Your money will be much more liquid and safe at Wells Fargo, Chase or Citi versus in an MMF. The establishment is in charge.

-RW