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The Federal Reserve and Money Funds

A recent paper, Shooting the Messenger: The Fed and Money Market Funds, examines recent concerns about money market funds expressed by the Federal Reserve.  In the paper, author Melanie Fein, a former senior counsel to the Board of Governors of the Federal Reserve System, reviews the Federal Reserve's call to change the regulation of money market funds (even though the Fed does not regulate these funds).  She finds "no basis for the view that MMFs are susceptible to runs," instead finding that the run that started the financial crisis was caused by a run on bank sponsored commercial paper.

Ms. Fein goes on to say that the liquidity facility and other actions undertaken by the Fed to stem the run on money market funds were actually designed to support the commercial paper market, which she asserts was the source of the systemic risk rather than money funds.  She also finds that the Fed's proposals to reform money market funds, particularly the capital buffer, would require money market funds "to act as lenders of last resort to the bank commercial paper market," which would ultimately cause the end of money funds.

Ms. Fein concludes that "imposing structural changes on MMFs to prevent a future fight to safety by MMF shareholders is the equivalent of shooting the messenger who brings bad news and would punish investors for their prudent behavior as much as if the government imposed a tax on depositors who withdraw their money from failing banks."

The paper can be found here:  http://www.sec.gov/comments/4-619/4619-157.pdf