Money market fund managers breathed a collective sigh of relief. As reported previously, these funds faced the possibility of
1. Having to “float” the value of their money market funds assets from $1 per share to what they’re actually worth
2. Putting aside higher capital requirements for riskier investments.
The heavily funded financial industry lobby played a major role in ensuring neither occurred As you may recall, in 2008 the Treasury rescued one such fund, Reserve Primary, to alleviate a possible panic in the money market fund industry by “breaking the buck,” or allowing that money market fund to price itself to its market value under $1 per share. Even with evidence of a recent failure, the Security and Exchange Commission did not have the support necessary to require this legislation.
This was no win for the consumer. Rather, it sends a message to the industry that the Treasury bailed it out before and will do so again. And you, the consumer, will be on the hook for it. You may want to think about that before you invest in a money market fund that is paying a significantly higher rate than its competitors. There is definitely a relationship between risk and return.
It’s interesting that this story is getting so little coverage. Instead, the mighty Dodd-Frank Wall St. Reform and Consumer Protection Act is all over the press. That’s good, right? You should be in favor of financial reform. Those greedy bankers should have their reins pulled in. Why should they get bailed out? You certainly weren’t.
You may be interested to know that there is absolutely nothing in the Dodd-Frank Act that would have prevented the recent financial meltdown. Yes, I have read it, and spent years in the business of interpreting and implementing regulations in the financial industry.
During that time, I saw the savings and loan crisis, several significant stock market corrections, several asset bubbles and the complete disintegration of the Glass-Steagall Act. Regulations are often sent out for comment before they’re implemented, and are cumbersome and poorly thought out. Those that are not sent out for comment are often closely followed with a “technical corrections” bill that often cause further headaches. Regulatory compliance departments and their legal staffs are constantly reminded that regulations are often written by people who may have never worked a day in the industry.
Thus, the law of unintended consequences. Here are a couple of them that you can see right now from Dodd-Frank.
1. According to a 2011 report from the FDIC and US Census Bureau, 12 million people turn to onerously expensive non-bank services like payday loans, pawn shops and check cashing services . As fee restriction increase, more and more Americans are “underbanked.” If you think bank fees are expensive, check out the charges at your local check cashing service.
2. The FDIC also reports that there are almost 60% less community banks in 2010 than in 1985, primarily due to mergers and consolidations. And it got worse between 2008 – 2012. While there are many contributing factors, one is certainly the cost of implementing complex regulations in a smaller vs. larger institution. Small banks simply cannot afford big compliance departments. Sometimes it’s more cost effective for the smaller banks to sell themselves to bigger banks than to implement significant regulation.
Larger number of Americans paying higher fees to check cashing services and payday loan companies, and a smaller number of community banks is probably not what you thought would result from Dodd-Frank. But, you probably also thought regulations for actual problems in the money market fund industry would pass.
You’d be wrong on both counts.