http://mikechamberslive.com/?p=3773
Here is an interesting article about a proposed change to the laws concerning money market accounts which have ballooned into the trillions of dollars. Specifially, it seeks to change Rule 2a-7. It would prevent people from withdrawing their money in times of future "crisis" for an undertermined amount of time, if at all. This comes at a time when government is desperatly seeking to find ways of extending maturaties and durations of short-term debt instruments. In fact, the Obama administration has been actively seeking to make money market unattractive by 1) keeping money market rates at record lows 2) removing money markets fund gaurantees 3) and even allowing repos to use money markets as a source of liquidity (because we all know that the collateral behind the banks shadow banking agreements with the Fed are litereally crap, as we have noted before, we will continue claiming this until the Fed disproves us by opening its books for full inspection) Yet these measures have not had the desired effect of making people choose other investments.
So if this provision passes will this be the end of money markets as we know it?
Will people stop throwing their money into them in favor of "cheap stocks" that the Obama administration has been pushing people to do since March 3rd of last year? The author of the article believes it will, however, with an aging baby boomer population, which would rather burn their money than leave than invest in the stock market again and relive the roller coster days of 2008-2009, the plan may well backfire, and may result in even more money leaving the shadow system and entering such tangible objects as deposit accounts (at community banks, of course), mattresses and socks.
All I buy are gov't bonds and IRAs. I never liked Madison's banking liberties and don't trust the Wall St fat cats who prosper when workers are fired or layed off.
I accept less interest return because I do not accept the greed and malice that is at the core stock trading. I do all I can to avoid lining the pockets of the Wall street rats.
So to whodey, this part I'm ok with - "and may result in even more money leaving the shadow system and entering such tangible objects as deposit accounts (at community banks, of course), mattresses and socks."
Originally posted by whodeyI followed the link in the article and don't see what the big deal is. Apparently the SEC already has the power to suspend redemptions on a case by case basis:
http://mikechamberslive.com/?p=3773
Here is an interesting article about a proposed change to the laws concerning money market accounts which have ballooned into the trillions of dollars. Specifially, it seeks to change Rule 2a-7. It would prevent people from withdrawing their money in times of future "crisis" for an undertermined amount of time, if at a tangible objects as deposit accounts (at community banks, of course), mattresses and socks.
On September 22, 2008, in response to a request by The Reserve Fund, the Commission issued an order permitting the suspension of redemptions in certain Reserve funds, to permit their orderly liquidation.45
http://www.sec.gov/rules/proposed/2009/ic-28807fr.pdf
People putting more money into deposit accounts at community banks would be a good thing; that's where most of the loans for small business expansion come from.
EDIT: It's boring banker talk but here's an explanation of the proposed change:
Absent the exemption provided by rule 22e–3T, a fund participating in the Guarantee Program that faces a run would be compelled by section 22(e) to continue to redeem shares. In order to raise the
280 The Treasury’s Guarantee Program guarantees that shareholders of a participating money market fund will receive the fund’s stable share price for each share owned as of September 19, 2008, if the fund liquidates under the terms of the Program. See supra note 55 and accompanying text.
281 See Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. 291 (1940) (statement of David Schenker, Chief Counsel, Investment Trust Study, SEC).
282 See Rule 22e–3T Adopting Release, supra note
31.
money to pay redemption proceeds to shareholders, a fund may have to sell portfolio securities. Massive redemption requests could thus force a fund to liquidate positions in a fire sale, further depressing the fund’s market value share price. Earlier redeeming shareholders would receive higher share prices (at or near the amortized cost) but, as a result of the fund’s diminishing asset base, later redeeming shareholders may receive lower prices.283 Moreover, as demonstrated by the events of last fall, a run on a single fund can quickly spread to other funds and, as multiple funds attempt to meet redemption requests, seriously deplete the value of portfolio holdings and drain the availability of cash and more liquid securities.
We believe that rule 22e–3T, which will expire on October 18, 2009 in conjunction with the Guarantee Program, should be replaced with a rule that would provide for a similar exemption independent of the Guarantee Program.284 Proposed rule 22e–3 would permit all money market funds to suspend redemptions upon breaking a buck, if the board, including a majority of independent directors, approves liquidation of the fund, in order to liquidate in an orderly manner. The proposed rule is intended to reduce the vulnerability of investors to the harmful effects of a run on a fund, and minimize the potential for disruption to the securities markets.
p.28 of link given above
Essentially it's to prevent runs on money market funds which completely deplete the fund and/or cause it to crash in value. Seems reasonable to me.