November 13, 2012
Good afternoon. As Secretary Geithner asked this Council to consider money market reforms, I think a key consideration is how policymakers find the appropriate balance. On the one hand, there’s what I’ll call the bear in the woods issue, and on the other hand, many of the alternatives being debated may significantly change the product that so many Americans rely upon.
There’s the old story about the bear in the woods.
Two campers at a campsite hear some disturbing sounds. At first it’s faint, but it becomes increasingly louder…the growl of the bear. What the campers come to understand is that it’s not just a race against the bear, but a race against each other.
While this may not be the perfect metaphor, that’s the issue the Securities and Exchange Commission (SEC) and this Council have been grappling with regarding money market funds.
By the very design of money market funds, when the first sounds of the bear market come, the campers who were sleeping with their running shoes on and first redeem their shares, have the ability to get 100 percent of their money. Other investors in the campsite, though, may suffer losses both for themselves and those left over by the first movers.
This well-known feature of money market fund design exacerbated market forces in the midst of a roaring bear market in 2008 and may have the potential to do so again in the future.
The SEC, through reforms in 2010, took important steps to strengthen money market funds. Through enhancing the portfolio quality, liquidity and transparency of funds, these reforms lowered their risk. There still remains the possibility, though, of bears sniffing around the campsite and incentives for some investors to run at the first footsteps or growl.
As we are asked to consider possible alternatives to address the bear in the woods issue of money market funds, for me it is with a keen appreciation of how important money market funds are to millions of Americans, to the businesses of this country, municipal governments and the markets.
Many of the alternatives being debated may significantly change the product that so many Americans rely upon. They could diminish the use of money market funds as an investment product and as a source of funding.
In what we are considering today, the Financial Stability Oversight Council has an advisory role. The proposal in front of us seeks public comment on both a determination and possible recommendations to the SEC, which ultimately has authority to set policies in this area. The proposal includes several alternatives, as well as requests comment on other possible reforms.
I support this proposal because I believe in seeking broad public input on how policymakers should best balance limiting the bear in the woods issue with the effects the available alternatives may have on the overall utility of money market funds, as well as the effects on our economy.
Last Updated: November 13, 2012