BERNANKE PROPOSES LESS RESTRICTIVE MONEY RULES (CORRECT)

STOCKSRATES & BONDSCURRENCIESMUTUAL FUNDSETFsCOMMODITIESECONOMIC CALENDAR
Bloomberg
Bloomberg Anywhere
Updated: New York, Mar 13 08:04
London, Mar 13 12:04
Tokyo, Mar 13 21:04
Search
Symbol Lookup

HomeNewsMarket DataInvestment ToolsTV and Radio
Feedback
Popular:
PoliticsEnvironmentMadoffIndustriesCurrenciesETFsInvestCEO Spotlight
News

* Exclusive
* Worldwide
* Regions
* Africa
* Asia
* Australia & New Zealand
* Canada
* China
* Eastern Europe
* Europe
* France
* Germany
* India & Pakistan
* Italy
* Japan
* Latin America
* Middle East
* U.K. & Ireland
* U.S.
* Markets
* Industries
* Economy
* Politics
* Law
* Environment
* Invest
* Science
* Opinion
* Spend
* Sports
* Arts and Culture
* Editors' Video Picks
* Bloomberg Markets Magazine
* Special Report


RESOURCES

* Bloomberg TV
* Bloomberg Radio
* Bloomberg Podcasts
* Bloomberg Press



More News
•
U.S. Stock Futures Climb; Bank of America, Citigroup, Wells Fargo Advance

•
Banks Rush Bond Sales as FDIC Says It May Increase Fees to Guarantee Debt

•
China's Wen Is `Worried' at Safety of U.S. Treasuries, Asks for Assurances



* STORY
* PHOTO
* VIDEO
*

Bernanke Proposes Less Restrictive Money-Fund Rules (Correct)
Share | Email | Print | A A A

By Christopher Condon

(Corrects spelling of Morrison in last paragraph.)

March 11 (Bloomberg) -- U.S. Federal Reserve Chairman Ben S. Bernanke said more regulation may be needed for money-market mutual funds, though he didn't endorse rules backed by former Fed chief Paul Volcker that would treat the industry more like banks.

Lawmakers and regulators should consider added restrictions on assets that money funds can own and a new "limited system of insurance" to protect investors, Bernanke said yesterday in a speech urging broad changes to U.S. financial oversight.

The comments signal Bernanke favors less aggressive rules for money funds than those recommended by a group including Volcker, an adviser to President Barack Obama. The group proposes regulating money-market funds more like banks, with reserve requirements and mandatory federal insurance.

NOTE:the commended signals benanke he favors less agressives rulefor money funs.

"He's being more measured in his remarks," Joan Swirsky, an attorney at Philadelphia law firm Stradley Ronon Stevens & Young LLP and a money-market fund legal specialist, said of Bernanke. "He's not throwing out the baby with the bathwater."

The proposals backed by the Volcker group "would eliminate money funds as we know them," Paul Schott Stevens, president of funds trade group the Investment Company Institute, said after they were disclosed in January.

Money-market mutual funds have drawn scrutiny since the collapse of the $62.5 billion Reserve Primary Fund in September. The New York-based money fund was the first in 14 years to break the buck, or drop below $1 a share. Its collapse, caused by losses on debt issued by bankrupt Lehman Brothers Holdings Inc., rattled confidence in the money funds, long considered the safest investments after bank accounts and Treasury debt.

Run on Funds

The incident sparked an industrywide run on money funds that can invest in corporate debt, known as prime funds. The retreat temporarily crippled the market for commercial paper as prime funds reduced holdings of the highest-rated debt by $200.3 billion, or 29 percent, in the final two weeks of September.

That helped drive the cost of issuing commercial paper to its highest level in eight months, squeezing companies, banks and public institutions that rely on the market to raise cash for expenses such as payroll. Combined with a pullback in bank lending, the commercial-paper freeze threatened to choke the economy.

The turmoil prompted regulatory proposals from the Group of Thirty, an independent policy organization whose members include Volcker, Treasury Secretary Timothy Geithner and Lawrence Summers, head of the White House's National Economic Council. In January, the group recommended that money funds either accept banking-industry controls or give up accounting rules that allow them to maintain a stable $1-a-share net asset value, or NAV.

Favoring Banks

Stevens, of the Washington-based Investment Company Institute, at the time called the Group of Thirty proposals "extraordinarily far-reaching recommendations that were made without any thought."

Volcker "wanted to kill money-market funds in favor of the banking sector" when he was chairman of the Fed from 1979 to 1987, Steven said.

ICI spokesman Gregory Ahern yesterday welcomed Bernanke's remarks without commenting on the specific proposals.

"We agree with Chairman Bernanke that money-market funds play a crucial role in the U.S. economy and appreciate his comments on the need to increase the resiliency of the money markets, generally, and money-market funds, in particular," he said.

NOTE:

The ICI in November formed a panel headed by Vanguard Group Inc. Chairman John J. Brennan to develop recommendations to improve the money-market fund industry. It is due to deliver its report by the end of March.

Assets in money-market funds have climbed to $3.83 trillion since falling to $3.33 trillion in the week following the freeze- up of Reserve Primary.

Two Approaches

Bernanke, in his speech to the Council on Foreign Relations, outlined two approaches to making money-market funds more stable. The first would place tighter restrictions on what funds could buy, "potentially requiring shorter maturities and increased liquidity."

Under rule 2a-7 of the Investment Company Act of 1940, money funds are required to invest only in highly rated debt that matures in less than 13 months.

Bernanke's remarks suggest the maturity limits could be shortened or "laddered," Swirsky said. That might require different percentage levels of a fund's portfolio to fall under staggered maturity caps.

Rule 2a-7 doesn't contain restrictions linked to the liquidity of investments other than to cap "illiquid securities" at 10 percent of a fund's holdings. Swirsky said liquidity requirements are "significant by their absence" in the rules. "I would not be surprised if that's added to the rule," she said.

Insurance Program

Such a change could provide funds with a better chance of meeting sudden, large withdrawal requests without being forced to sell assets at a loss, Swirsky said.

Bernanke's second approach would involve establishing "a limited system of insurance for money-market mutual funds that seek to maintain a stable net asset value," he said.

Three days after the demise of Reserve Primary, the U.S. Treasury set up the Temporary Guarantee Program for Money Market Funds, insuring participating funds against losses for three months. The program, which succeeded in halting the panic surrounding money funds, has since been extended to April 30.

Peter Crane, president of Crane Data LLC, a money-fund tracking firm in Westborough, Massachusetts, said Bernanke appears to be calling for a private insurance program or "quasi- government" version to take over from the Treasury on a permanent basis.

Crane said this and the rest of Bernanke's remarks would likely be well-received by the investment industry.

"We all need to be sensitive that radical change may do more harm than good," Charles Morrison, head of money markets at Boston-based Fidelity Investments, said in an interview. Fidelity managed $500 billion in money-market assets as of Jan. 31.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net
Last Updated: March 11, 2009 08:26 EDT

* Delicious
* Digg
* Facebook
* LinkedIn
* Newsvine
* Propeller
* Yahoo! Buzz


Sponsored links

Bloomberg.comNEWS | MARKET DATA | INVESTMENT TOOLS | TV AND RADIO | ABOUT BLOOMBERG | CAREERS | CONTACT US | LOG IN/REGISTER
Terms of Service | Privacy Policy | Trademarks | Site Map | Help | Feedback | Advertising | 日本語サイト
Get Quote
CRNIMFA7:IND
Search News