breaking bucks in money market strongfundsstrong - berkeley law home.pdf

BIRDTHISTLE – FINAL 12/14/2010 2:22 PM BREAKING BUCKS IN MONEY MARKET FUNDS WILLIAM A. BIRDTHISTLE * This Article argues that the Securities and Exchange Commission’s first and most significant response to the economic crisis increases rather than decreases the likelihood of future failures in money market funds and the broader capital markets. In newly promulgated regulations addressing the “breaking of the buck” in the $3 trillion money market—a debacle at the fulcrum of the 2008 financial meltdown—the SEC endorses practices that obfuscate rather than illuminate the capital markets, including fixed pricing for money market funds, potentially riskier portfolio requirements, and the continued use of discredited ratings agencies. These policies, premised implicitly upon doubt in the ability of markets to process information effectively, obscure the true perils of money market funds. Rather than swaddling investment risks in misleading regulatory padding, the SEC should illuminate the possible menace of these funds. This Article offers transparent solutions to alleviate moral hazard and systemic risk in the broader market and to end the regulatory subsidy of these specific investments. Introduction 1156 I. The Growth and Regulation of Money Market Funds 1163 A. Mutual Funds and Floating NAVs 1164 1. Mark-to-Market Accounting 1165 2. The Consequences of Redemption 1167 3. The Phenomenon of Runs 1169 B. Regulation Q and Limits on Interest in Bank Accounts ... 1170