Government: Your Legal Right To Redeem Your Money Market Account May Be Denied

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DrKrbyLuv's picture
DrKrbyLuv
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Posts: 1995
Government: Your Legal Right To Redeem Your Money Market Account May Be Denied

Hello,

I changed the original Zero Hedge article from "This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied" to my topic of "Government: Your Legal Right To Redeem Your Money Market Account May Be Denied" to be clear that this has not yet happened.  I don't want to alarm anyone as I know many of us have at least some money in money markets.  This is a head's up article from my perspective and hopefully others may have more info on the likelihood of when and if this may happen.

The concern is that if this legislation goes through, you may not have the ability to remove your money quickly out of the money markets.  This would be a big departure as one of the benefits of the money market was the prerogative to get out - liquidity in lieu of yield.

...new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to "suspend redemption to allow for the orderly liquidation of fund assets."

You read that right: this does not refer to the charter of procyclical, leveraged, risk-ridden, transsexual (allegedly) portfolio manager-infested hedge funds like SAC, Citadel, Glenview or even Bridgewater (which in light of ADIA's latest batch of problems, may well be wishing this was in fact the case), but the heart of heretofore assumed safest and most liquid of investment options: Money Market funds, which account for nearly 40% of all investment company assets.

The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal." This is precisely the regulation now proposed by the administration.

In essence, the entire US capital market is now a hedge fund, where even presumably the safest investment tranche can be locked out from within your control when the ubiquitous "extraordinary circumstances" arise. The second the game of constant offer-lifting ends, and money markets are exposed for the ponzi investment proxies they are, courtesy of their massive holdings of Treasury Bills, Reverse Repos, Commercial Paper, Agency Paper, CD, finance company MTNs and, of course, other money markets, and you decide to take your money out, well - sorry, you are out of luck. It's the law.

A brief primer on money markets

A very succinct explanation of what money markets are was provided by none other than SEC's Luis Aguilar on June 24, 2009, when he was presenting the case for making even the possibility of money market runs a thing of the past. To wit:

Money market funds were founded nearly 40 years ago. And, as is well known, one of the hallmarks of money market funds is their ability to maintain a stable net asset value — typically at a dollar per share.

In the time they have been around, money market funds have grown enormously — from $180 billion in 1983 (when Rule 2a-7 was first adopted), to $1.4 trillion at the end of 1998, to approximately $3.8 trillion at the end of 2008, just ten years later. The Release in front of us sets forth a number of informative statistics but a few that are of particular interest are the following: today, money market funds account for approximately 39% of all investment company assets; about 80% of all U.S. companies use money market funds in managing their cash balances; and about 20% of the cash balances of all U.S. households are held in money market funds. Clearly, money market funds have become part of the fabric by which families, and companies manage their financial affairs.

A little more on money markets:

Money market funds seek to limit exposure to losses due to credit, market, and liquidity risks. Money market funds, in the United States, are regulated by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940. Rule 2a-7 of the act restricts investments in money market funds by quality, maturity and diversity. Under this act, a money fund mainly buys the highest rated debt, which matures in under 13 months. The portfolio must maintain a weighted average maturity (WAM) of 90 days or less and not invest more than 5% in any one issuer, except for government securities and repurchase agreements.

Rule 22e-3, From the SEC:

Proposed rule 22e–3(a) would permit a money market fund to suspend redemptions if: (i) The fund’s current price per share, calculated pursuant to rule 2a–7(c), is less than the fund’s stable net asset value per share; (ii) its board of directors, including a majority of directors who are not interested persons, approves the liquidation of the fund; and (iii) the fund, prior to suspending redemptions, notifies the Commission of its decision to liquidate and suspend redemptions, by electronic mail directed to the attention of our Director of the Division of Investment Management or the Director’s designee. These proposed conditions are intended to ensure that any suspension of redemptions will be consistent with the underlying policies of section 22(e). We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares. Accordingly, our proposal is limited to permitting suspension of this statutory protection only in extraordinary circumstances. Thus, the proposed conditions, which are similar to those of the temporary rule, are designed to limit the availability of the rule to circumstances that present a significant risk of a run on the fund. Moreover, the exemption would require action of the fund board (including the independent directors), which would be acting in its capacity as a fiduciary. The proposed rule contains an additional provision that would permit us to take steps to protect investors. Specifically, the proposed rule would permit us to rescind or modify the relief provided by the rule (and thus require the fund to resume honoring redemptions) if, for example, a liquidating fund has not devised, or is not properly executing, a plan of liquidation that protects fund shareholders. Under this provision, the Commission may modify the relief ‘‘after appropriate notice and opportunity for hearing,’’ in accordance with section 40 of the Act.

The skinny is that I think this needs watched and no doubt, smarter than myself on this stuff may be able to put this in perspective.

Let's continue watching our for one another,

Larry

Thomas Hedin's picture
Thomas Hedin
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Posts: 815
Re: Government: Your Legal Right To Redeem Your Money ...

Redeemable in what?

Tycer's picture
Tycer
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Joined: Apr 26 2009
Posts: 610
Re: Government: Your Legal Right To Redeem Your Money ...

Great post.

John99's picture
John99
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Joined: Aug 27 2009
Posts: 490
Re: Government: Your Legal Right To Redeem Your Money ...

This is monumental! As they say in the last line of the article,

'Alternatively, the game of "last fool in", holding the burning hot potato, can continue indefinitely, until such time as the marginal utility of each and every dollar printed by Ben Bernanke is zero."

So I have no idea the process of enacting proposed SEC legislation, but we must keep a watchful eye. This is also a natural tie in to Moveyourmoney, which soon might include MM Funds.

Thanks Larry

Ken C's picture
Ken C
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Joined: Feb 13 2009
Posts: 753
Re: Government: Your Legal Right To Redeem Your Money ...

If such a rule were to be enacted then it seems to me that this would pretty well lock up all investment.

Suppose that you have stocks, bonds or anything other investment at a broker. If you decided to sell said investment then the money gets put into a "sweep" account which is a money market fund. Then you could not get it out.

Am I wrong about this?

 

Ken

 

Headless's picture
Headless
Status: Gold Member (Offline)
Joined: Oct 28 2008
Posts: 363
Re: Government: Your Legal Right To Redeem Your Money ...

This is nothing other than an insurance policy for those (Right! Goldman Sachs) that already control the market. If they are going to have big money in, then they want to know that when the SHTF (that unexpected occurrence that we all know is coming, as it always does), they (Right! Goldman Sachs) will not have to compete human beings (as opposed to Right! Goldman Sachs traders) when attempting to distribute their holdings.

Plain and simple: you find the lobbying behind this; it's Goldman Sachs.

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