CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 1039
Thus, narrow banks would effectively operate as FDIC-insured
MMMFs. To prevent unfair competition with narrow banks, and to
avoid future government bailouts of uninsured MMMFs, MMMFs
should be prohibited from representing, either explicitly or implicitly,
that they will redeem their shares based on a “constant net asset
value” (NAV) of $1 per share. 382 Currently, the MMMF industry,
which manages about $3 trillion of assets, leads investors to believe
that their funds will be available for withdrawal (redemption) based
on “a stable price of $1 per share.” 383 Not surprisingly, “the $1 share
price gives investors the false impression that money-market funds
are like [FDIC-insured] banks accounts and can’t lose money.” 384
However, “[t]hat myth was shattered in 2008” when Lehman’s default
on its commercial paper caused Reserve Primary Fund (a large
MMMF that invested heavily in Lehman’s paper) to suffer large
losses and to “break the buck.” 385 Reserve Primary Fund’s inability
to redeem its shares based on a NAV of $1 per share caused an
investor panic that precipitated runs on several MMMFs. The
Treasury Department responded by establishing the Money Market
Fund Guarantee Program (MMFGP), which protected investors in
participating MMMFs between October 2008 and September 2009. 386
Critics of MMMFs maintain that the Treasury’s MMFGP has
created an expectation of similar government bailouts if MMMFs
382 Cf. Daisy Maxey, Money Funds Exhale After New SEC Rules, but Should They?,
WALL ST. J., Feb. 2, 2010, at C9 (describing the SEC’s adoption of new rules governing
MMMFs and reporting on concerns expressed by representatives of the MMMF industry
that the SEC might someday force the industry to adopt a “floating NAV” in place of the
industry’s current practice of quoting a constant NAV of $1 per share).
383 David Reilly, Goldman Sachs Wimps Out in Buck-Breaking Brawl, BLOOMBERG
(Feb. 2, 2010), http://www.bloomberg.com/news/2010-02-02/goldman-sachs-wimps-out
-in-buck-breaking-brawl-david-reilly.html.
384 Id.; see also Kay, supra note 144, at 65 (arguing that an MMMF with a constant
NAV of $1 per share “either confuses consumers or creates an expectation of government
guarantee”).
385 Reilly, supra note 383; see also Christopher Condon, Volcker Says Money-Market
Funds Weaken U.S. Financial System, BLOOMBERG (Aug. 25, 2009), http://www
.bloomberg.com/apps/news?pid=newsarchive&sid=a5O9Upz5e0Qc.
386 Reilly, supra note 383 (describing “panic” that occurred among investors in
MMMFs after Lehman’s collapse forced the Reserve Primary Fund to “break the buck”);
Malini Manickavasagam, Mutual Funds: Citing Stability, Treasury Allows Expiration of
Money Market Fund Guarantee Program, 93 Banking Rep. (BNA) 508 (Sept. 22, 2009)
(reporting that “[t]o prevent other money market funds from meeting the Reserve fund’s
fate, Treasury launched its [MMFGP] in October 2008” and continued that program until
September 18, 2009); see also PWGFM-MMF Report, supra note 380, at 8–13 (discussing
support provided by the Treasury and the FRB in order to stop the “run” by investors on
MMMFs following Lehman’s collapse in September 2008).