Many of the problems that have afflicted the financial system over the past two years can be traced directly to abuses in the wild-west world of the (largely unregulated) shadow banking system. Subprime mortgage CDO securitizations, credit defaults swaps, you name it. They all fall outside the purview of state and federal banking regulators. Which is a key reason why those products were able to mutate so quickly into financial versions of IEDs that nearly blew up the entire economy.
People often forget that the mother’s milk that finances a big chunk of the shadow banking system is that vast, unregulated pot of money known as money market funds.
In a very real way, money market funds are the foundation of Wall Street’s worst excesses. They compete directly for bank deposits, yet MMF issuers don’t have to pay for deposit insurance or labor under regulatory severe restrictions. Nor do they have to carry out any crazy social missions, such as Community Reinvestment Act, mandated by Congress.
So MMF issuers are free-riding cowboys. Still, when the current crisis began, the first thing the government did was unconditionally guarantee these funds in order to protect the Morgan Stanleys and Merrill Lynches of the world—the very same unfair competitors that were the source of so much systemic upheaval in the first place!
Now the S.E.C. proposes, in the name of “safety,” several reporting and operating rules for MMFs, all of which figure to be toothless and have little effect on how issuers do business. It’s just another example of Wall Street protecting itself.
There is only one solution: if the money market funds want to offer themselves as an alternative to bank deposits, they need to operate under the same rules that banks do. That means:
- Paying for deposit insurance.
- Accepting the social burdens borne by banks.
- Providing financial transparency similar to banks’.
Financial regulation that doesn’t include oversight of the shadow banking system cannot be effective. Money market funds look like bank deposits, walk like bank deposits--and must be regulated like bank deposits. You bankers that continually whine about unfair competition, this is your chance!
What do you think? Let me know!