Philipp Schnabl: April 2010 Archives

Money Funds Too Big to Be Ignored

| | Comments (0) | TrackBacks (0)
by Marcin Kacperczyk and Philipp Schnabl

Money market funds are the stepchildren of finance. Though they manage more than $4 trillion in assets, they have not gotten much attention recently. Sen. Chris Dodd's regulatory reform proposal does not even mention money market funds. Is the omission justified?

If you analyzed the track record of money market funds up to 2007, you would think that Sen. Dodd is right. Money market funds are simple structures; some may even call them boring. They collect deposits and invest them in (almost) riskless money market instruments. In doing so, they earn a small yield while making sure the fund does not lose any money or, in Wall Street parlance, "never breaks the buck." For this reason, many investors think of money market deposits as the big brother to bank deposits. The only difference between the two is that money market deposits have no Federal Deposit Insurance Corp. guarantee.

However, if you analyze the performance of money market funds during the financial crisis, you would find that their omission from the Senate legislation is a glaring mistake.

Read our full opinion editorial at American Banker (subscription required)

About RegulatingWallStreet.com

The Dodd-Frank Act, signed into law in July 2010, represented the most significant and controversial overhaul of the U.S. financial regulatory system since the Great Depression. Forty NYU Stern faculty, including editors Viral V. Acharya, Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, provide a definitive analysis of the Act, expose key flaws and propose solutions to inform the rules’ adoption by regulators, in a new book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance (Wiley, November 2010).

About Restoring Financial Stability

Previously, many of these faculty developed 18 independent policy papers offering market-focused solutions to the financial crisis, which were published in a book, Restoring Financial Stability: How to Repair a Failed System (Wiley, March 2009).

About the Authors