Among the early targets for reform were money market mutual funds, which played an undeniable role in the financial crisis. Money market funds -- which currently have nearly $2.6 trillion in assets -- are designed to offer investors a relatively low yield in exchange for a stable share price of $1. But unlike bank deposits, money market funds offer no insurance against default; there is, in other words, no formal guarantee that their investors will be able to withdraw $1 for every $1 they invest.
For much of the industry's 40 year history, this was viewed by many as a distinction without a difference, as money market fund managers sought to ensure that their funds never betrayed investor trust by "breaking the buck." In 2008, however, the fragility of this structure was made clear. The collapse of Lehman Brothers caused the Reserve Primary Fund to suffer significant losses, sending the fund's share price plunging to 97 cents.
That, in turn, prompted a run on all money market funds, as investors sought to pull their money out before their own funds suffered a similar fate. In just one week, approximately 15 percent of all money fund assets were withdrawn.
This rush for the exits posed severe problems for the corporations that typically rely on money market funds to purchase their short-term debt, with the market for this debt essentially drying up overnight. In response, the U.S. Treasury Department took the unprecedented step of guaranteeing money fund investments, while the Federal Reserve purchased billions of dollars' worth of these suddenly illiquid securities so that the funds could meet redemption requests. Both steps bought the markets the breathing room they needed.
In order to prevent future government intervention, the SEC in 2010 required money market funds to keep more cash on hand in order to meet a sudden uptick in redemptions, a reform that money market managers supported.
That's where the agreement ends, however. SEC chairman Mary Schapiro argued that further steps were warranted and pushed for a rule requiring money market funds to adopt a floating share price, which would reflect the value of their underlying securities.
Shapiro's proposal was supported by both the Treasury Department and the Federal Reserve. (Demonstrating the need for such reform and the fragility of the $1 share price, the Boston Fed said in a study earlier this year that money market funds were bailed out by the managers that sponsor them to the tune of $4.4 billion in the five years ended 2011.)
Unsurprisingly, the money market fund industry was stridently opposed to such a change, arguing that it would result in investors pulling their assets out of money market funds in favor of less regulated alternatives.
Despite a furious lobbying campaign by the mutual fund industry, Schapiro forged ahead, and had tentatively scheduled a formal vote on this reform for next week. Those plans were scuttled when commissioner Luis Aguilar -- who previously served as general counselor for mutual fund manager Invesco -- said that he believed the issue required further study.
Calls for "further study," of course, are often Washington-speak for "I'm never voting for this," which is why Shapiro responded by urging that the issue be taken up by another regulatory body.
While that remains a possibility, the odds are long. The fact is that further money market reform suffered a serious blow last week, done in by a deep-pocketed opposition and regulators with short memories.