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)