It's Official, SEC approves freezing of Money Market Funds

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It's Official, SEC approves freezing of Money Market Funds

From zerohedge...

Suspending Money Market Redemptions Is Now Legel; SEC Approves New Money Market Regulation In 4-1 Vote

Submitted by Tyler Durden on 01/27/2010 11:31 -0500


Zero Hedge discussed a month ago the disastrous prospects of what would happen if the new proposal contemplated by the SEC, which would allow the suspension of redemptions from Money Market Funds, were to pass. Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC's just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: "We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares." Too bad investors' hardships considerations ended up being completely irrelevant.....

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Re: It's Official, SEC approves freezing of Money Market ...

Zerohedge mainpage was having connection problems to their articles (when I posted), so here is the article link:

http://www.zerohedge.com/article/suspending-money-market-redemptions-now-legel-sec-approves-new-money-market-regulation-4-1-v

More of the article:

As the SEC noted: "We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares." Too bad investors' hardships considerations ended up being completely irrelevant.

As a reminder, here is the gist of the proposal as pertains to redemption suspension:

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.

Now interestingly, I wanted to check this out on other news sites and can not find mention of the freezing of redemptions on Reuters of WSJ

http://online.wsj.com/article/SB10001424052748704094304575029131155216718.html?mod=googlenews_wsj


http://www.reuters.com/article/idUSTRE60Q4KO20100127

Not a mention, so if anyone else can confirm the zerohedge claim, I'd appreciate it.

If true I'd be moving money out of MM funds.

 

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Re: It's Official, SEC approves freezing of Money Market ...

OK. So does this and the world economy forum going on today at Davos have any connection?

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Re: It's Official, SEC approves freezing of Money Market ...

John 

I am checking Before Its News right now but nothing yet.

I am sure they will have it along with the little purple people 

stealing the gold that is not in Fort Knox.

V

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Re: It's Official, SEC approves freezing of Money Market ...

Looks like this has to do with the Prime Reserve fund that "broke" the buck in Sept. 2008 (due to the collapse of L. Bros.) -  as a side note, that fund still has not been totally liquidated and shareholders have received about 90% of the value as of Sept. 2008.  The final payout is to be this week or next with a total payout of 99%.  So, shareholders of the Prime Reserve fund lost 1% of their money and it took 1 1/2 years to get the investment back.  Most people, including the financial world, are unaware of this situation.  From what I can see, your article above is referring to this particular situation

see http://www.sec.gov/rules/ic/2008/ic-28465.pdf

But, the point should be made clear, that the SEC and congress allowed one of the largest money market mutual funds to break the buck, it can easily happen again.  The only safe money market funds would be ones that only invest in treasury securities and they are not paying anything right now.  In fact yesterdays 4 week treasury auction was a negative yield  http://www.bloomberg.com/apps/news?pid=20601103&sid=ahegQQCnLVyo

 

IF anyone can find any current information I would love to see it and read it..

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Re: It's Official, SEC approves freezing of Money Market ...

Thanks for the dig John99, you always come up with good stuff.  This is an important issue and a blatant power grab on our money.

They know what's coming and are making sure we are the losers  Big insiders will know when to get out and the avalanche they create will bury the rest of us.

Larry 

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Re: It's Official, SEC approves freezing of Money Market ...
DrKrbyLuv wrote:

They know what's coming and are making sure we are the losers  Big insiders will know when to get out and the avalanche they create will bury the rest of us.

Larry 

And then maybe enough of "us" will get pissed off to do something about it.

I do believe it's open season on incumbents.  I don't care which side of the aisle they are on - come 3 November a lot of our elected "leadership" is going to wake up unemployed trying to figure out who was driving the truck that ran them over.

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Re: It's Official, SEC approves freezing of Money Market ...

I just read this news on the NASDAQ  website and it appears to be true....

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201001271146dowjonesdjonline000534&title=updatesec-money-market-rule-requires-value-fluctuation-disclosure

 

But, in my opinion, it really is not much of a change.  I  am very familiar with what happened to the prime reserve fund in Sept. 2008.  L. Bros went under on Monday, we found out Monday night that the prime reserve money market fund had 600million in L Bros bonds, tried to liquidate our positions on Tuesday and the fund did not allow the liquidation request.  But the institutional investors were able to get out..... hard to believe I know.    Not sure the mechanics behind the decision - whether the board voted or the SEC stepped in but a decision was made very quickly.  It appears to me that the ruling today just makes it official what the fund companies already felt they could do, and did do back in the beginning of this melt down. 

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Re: It's Official, SEC approves freezing of Money Market ...

Does anyone have the reference to the entry on this in  the Federal Register?

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Re: It's Official, SEC approves freezing of Money Market ...

Thank you, Memorrison, Zerohedge comes through again.

From the NASDAQ site:

"The rules also would permit a money-market fund's board of directors to suspend redemptions if the fund is about to "break the buck" by having a net asset value fall below $1 per share. Currently the board must request an order from the SEC to suspend redemptions.

The halting of redemptions will stem the motivation for runs. It also will eliminate the need for a failing fund to sell securities into a potentially de- stabilized market and further drive down prices," Schapiro said.

SEC Commissioner Kathleen Casey dissented in the vote, protesting the new rule's requirements that money-market funds use credit rating agencies to evaluate securities. In Casey's view, that part of the rule encourages the industry's reliance on credit rating agencies, which can be wrong in their assessments.

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=20100127...

Now investors have one further tight-rope to walk, which as Morrison points out, could freeze their assets for unknown periods. Another could call for gold!

 

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Re: It's Official, SEC approves freezing of Money Market ...

IMO it's troubling, but like memorrison I don't see this as really making a difference in the grand scheme of things.  TPTB would pull this stunt with or without the new rule if they felt it was in their own interest.  "It's easier to ask forgiveness rather than permission" seems to be the order of the day in all facets of government and finance, so they'd just go ahead and do it and perform damage-control and attempt to justify their actions later.  All this does is make it a tad more convenient for them.  There is no practical difference in having an official right that would be ignored vs. not having that right in the first place.

But what I do read from this is that if they bothered to put such a rule in place (when they probably could get away with freezing funds anyway), it means the likelihood of such a future action being necessary (from their perspective at least) is considerably higher than normal.  I'm going to have to talk with my parents and make sure they don't have too much cash sitting in money markets.

- Nickbert

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Re: It's Official, SEC approves freezing of Money Market ...

This is bad. Beyond bad.

Being absolutely realistic and honest with the assessment: 

  1. Financial institutions are using mark to fantasy accounting, thanks to Congress and the FASB. Without this mark to fantasy accounting they are and would be noticeably insolvent.
  2. Many institutions are hiding late mortgages, I've heard reports where people upside down in FL are over 12 months without any service of debt and in their house with only one NOD.
  3. Many institutions have more off balance derivatives than equity. JPMC 1.7 t in assets and 88 t in derivatives. 
  4. We have a 1.6 quadrillion shadow banking (derivative market) with at least 200 trillion in banks on US soil. When this goes, there isn't going to be a bailout or savior of any shape or form. This is massive.

There is much more.

But with just 1-4 we could face systemic risk never seen before. The FDIC is insolvent. These institutions could fold. If the equities start tanking many will move funds into MM accounts backed by bonds. We are talking entire life savings here. Not letting them withdraw is criminal. It is stupidity. 

The SEC is the biggest bunch of morons on the face of the planet. If they need something to do they should go regulate naked short selling and take classes from guys like Markopolus. 

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Re: It's Official, SEC approves freezing of Money Market ...
Davos wrote:

This is bad. Beyond bad.. 

The SEC is the biggest bunch of morons on the face of the planet. If they need something to do they should go regulate naked short selling and take classes from guys like Markopolus. 

I don't think they are morons.  I think they know exactly what they are doing.  They are protecting the system -- not the consumer/saver.  I think they are criminals not morons.

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Re: It's Official, SEC approves freezing of Money Market ...
docmims wrote:
Davos wrote:

This is bad. Beyond bad.. 

The SEC is the biggest bunch of morons on the face of the planet. If they need something to do they should go regulate naked short selling and take classes from guys like Markopolus. 

I don't think they are morons.  I think they know exactly what they are doing.  They are protecting the system -- not the consumer/saver.  I think they are criminals not morons.

I see your point: Mine is they are a parasite that is killing the host - they too will starve off. Einstein that isn't. Wink

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Re: It's Official, SEC approves freezing of Money Market ...

I am totally with you on this Davos. This needs to somehow get out the the masses. This is our money not theirs. So now they are basically saying that we do not have a right to our own money or the right to decide what we do with it. I am calling all Americans to get the word out about what the SEC is doing. There will some very surprised people out there when this goes down. I am going to start by sending something into the editorial section. Do you mind if I use your write up above?

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Re: It's Official, SEC approves freezing of Money Market ...
isjrb029 wrote:

I am totally with you on this Davos. This needs to somehow get out the the masses. This is our money not theirs. So now they are basically saying that we do not have a right to our own money or the right to decide what we do with it. I am calling all Americans to get the word out about what the SEC is doing. There will some very surprised people out there when this goes down. I am going to start by sending something into the editorial section. Do you mind if I use your write up above?

Hello IsJrb- feel free. Just to clarify the "we" in we don't have a right to our own money - I took mine. This is a time of insanity. I don't believe any sane decisions will be made during this juncture. 

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Re: It's Official, SEC approves freezing of Money Market ...

Davos I have been sitting on this decision. I pulled out in 08 to MM the night GW came on the tube with his eyes wide open. It scared the crap out of me. Then took a 20K loan out from it. I am in the same situation as others and would have to quit my job to get my money. Decisions decisions what  to do? Thanks for all you contribute and everybody else on this site.

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Re: It's Official, SEC approves freezing of Money Market ...

Anybody have any knowledge of what kind of assets might be pushed into MM funds? Have read the Fed is anxious to find new sources of capital, and then there are all these toxic assets floating around?

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Re: It's Official, SEC approves freezing of Money Market ...

I agree that the SEC must see the likely hood of another "run" on money market funds is probable so they voted on this action.  In reality, when TSHTF, money markets are subject to losing money like any other investment. Like Davos laid out -  People will flock to get out of the equity markets and go to MMFs which are invested in various debt instruments that will likely start to default.  People will start to lose money in MMF funds and the panic will really start.  The only safe place is treasury money market mutual funds or FDIC insured account they earn nothing right now, but unless our government defaults on the treasury bonds or the FDIC coverage those funds should not lose much.  IF and when the government defaults, the only thing I think will do well is physical assets like gold and silver.  In the mean time I am in the deflation camp.  I think gold and silver are going to drop like rocks, so people are going to jump out of those assets and move to money market funds...... the same people who bought it at 1,100 to 1,200....  This will get ugly, just when and how is it all going to play out... interesting times we live in!

 

 

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Re: It's Official, SEC approves freezing of Money Market ...

 

Please help me

If thing are so unusual why woukd gold drop in value ?

Luc

 

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Re: It's Official, SEC approves freezing of Money Market ...

That's it. No commercial paper for me anyone. The returns suck and the only purpose of parking cash there was to use it as an ultra-liquid safe harbor. 

Government, you suck. 

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FDIC insured banks already can suspend withdrawal of deposits

Read the fine print of any bank deposit agreement. You will usually, if not always, find buried in it a clause that gives the bank the authority to suspend, or at least to require advance notice of, withdrawal of any deposited funds. Read any money market fund prospectus. There is seldom if ever any guarantee that the par value will be maintained, and it's usually clearly stated that "you can lose money."

Notwithstanding the above, this SEC action may indicate a higher chance of a financial meltdown than most people, even now, believe.

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Re: It's Official, SEC approves freezing of Money Market ...

 

 

 

If you have your money in a bank or a money market account you are at grave risk.

IMHO

V

 

 

 

 

 

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Re: It's Official, SEC approves freezing of Money Market ...
Luc wrote:

 

Please help me

If thing are so unusual why woukd gold drop in value ?

Luc

 

Gold is a very volatile commodity.  It trades supply/demand and also is effected by the value of the US dollar.  When the US dollar rises -- as it has been lately the value of gold falls.  Go to the front page of Kitco.com and you can see the relative contribution of currentcy value and demand on gold value for the day.  Also if you look at the charts you may see the value of gold change  for the day is small but there was an intraday swing of 20 to 30 dollars.  Note what happens especially in the time around the opening of the NY markets where gold is traded as a paper asset vs the Hong Kong and London physical asset markets.

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Re: It's Official, SEC approves freezing of Money Market ...

Please help me

If thing are so unusual why woukd gold drop in value ?

Luc

Mem wrote:

In the mean time I am in the deflation camp.  I think gold and silver are going to drop like rocks, so people are going to jump out of those assets and move to money market funds...... the same people who bought it at 1,100 to 1,200....  This will get ugly, just when and how is it all going to play out... interesting times we live in!

IMHO. Step back and look at the big picture not at market tinkering. The end game is this. FIAT CURRENCY IS DONE. Whether it now or later doesn't matter. I also think gold and silver will drop not because of market forces but because of market manipulation. Gold and silver are a constant reminder that fiat currency is worthless so their market value has to be surpressed to keep the assumed value of fiat high enough for people to keep believing in it. But this won't last forever and only suckers will be stuck with paper promises of ANY kind. IMO buy physical gold and silver at any price, as much as you can. You will be rewarded.

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Re: It's Official, SEC approves freezing of Money Market ...
Johnny Oxygen wrote:

IMHO. Step back and look at the big picture not at market tinkering. The end game is this. FIAT CURRENCY IS DONE. Whether it now or later doesn't matter. I also think gold and silver will drop not because of market forces but because of market manipulation. Gold and silver are a constant reminder that fiat currency is worthless so their market value has to be surpressed to keep the assumed value of fiat high enough for people to keep believing in it. But this won't last forever and only suckers will be stuck with paper promises of ANY kind. IMO buy physical gold and silver at any price, as much as you can. You will be rewarded.

Buy on them thar dips.  I'm ready for a l'il shakeout.  Back to Albany I go...

Viva -- Sager

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Re: It's Official, SEC approves freezing of Money Market ...

I agree physical gold and silver are great investments for when US dollar collapse occurs.  I would not be a seller of the physical metals, but if you are trying to play the market and make some money in ETF and funds, watch out.  If deflation comes about for a period, and the dollar continues to strengthen, precious metals could be in for a bigger fall than most people think.  I am just warning people that if they think gold and silver will save them from the market falling, be careful.  Imagine if some of the prognosticators are correct - like Bob Prechter- who is predicting gold down to around 600 and silver $7 or so, I may have the numbers incorrect, but the point is a major drop.  If you are purchasing with hopes that they  will "hold" its value, you may be very disappointed and nervous in the short term.  But, eventually when the dollar collapse occurs, I think you will be greatly rewarded, you just have to be ready for what could be a wild ride…

Please note this is a deflation argument, and a lot of people are in an inflation camp.  I do believe inflation will ultimately arrive, just a bad bout of deflation prior to its arrival.

These past couple of weeks are a good example of panic that causes people to buy the dollar. Crazy and it drove the 4 week treasury auction to negative yield this past week. Why would anyone buy a guaranteed negative return investment?  The Euro is dropping and the US dollar is strengthening,  we (the US $) is still perceived as the best looking horse in the glue factory – but the end result will be the same.  Just not sure when or how we will get there!

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Re: It's Official, SEC approves freezing of Money Market ...

Please note this is a deflation argument, and a lot of people are in an inflation camp.  I do believe inflation will ultimately arrive, just a bad bout of deflation prior to its arrival.

I wish I could remember where this article is but in it the argument was made that we are currently experiencing deflation but because of all of the quantitive easing creating inflation the two are canceling each other out. The author likened it to a tug of war match were in the end someone wins gloriously and someone fails catastophically.

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Re: It's Official, SEC approves freezing of Money Market ...

Johnny-

It is like a tug of war - fed printing and trying to get inflation.  They want it really bad - they can fight inflation, but are powerless to fight deflation.  With the amount of bad debt around the US, and world, the proping up of the housing market, the amount of consumer credit that is falling off a cliff, all bode for deflation.  We have to correct 30 years of excess spending- I was in the inflationary camp for a long time, but now I am planted firmly in the deflation camp.

If you do not recieve John Mauldin's emails you should.  Here is a link to a recent commentary that lays out the argument for deflation and where we are at:  http://www.2000wave.com/gateway.asp

 

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Re: It's Official, SEC approves freezing of Money Market ...

Food prices around here are  voting deflation currently,  I was seeing steep price increases for 2009,  but suddenly over the last two weeks they have begun to fall rapidly.   Cereal went from 3.75 a box to 1.39.

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