Inside Financial Services


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James Stewart explains how the S.E.C.’s plan to tighten regulation of money market funds came unglued:

The S.E.C.’s proposed changes had the backing of the White House, Treasury officials, the Federal Reserve, the Bank of England, a council of academic experts, The Wall Street Journal’s conservative editorial page, the former Fed chairman Paul Volcker, the former Treasury Secretary Henry M. Paulson Jr. – just about every disinterested party who weighed in on the issue. . . .

Though Republicans in Congress have generally sided with the mutual fund industry, and the reforms emerged from a Democratic administration, several people I spoke to said it was a mistake to view the outcome through the prism of partisan politics. “It’s not Republicans versus Democrats,” a person involved in formulating the proposals told me. “It’s the mutual fund industry and its allies versus the American taxpayer.” [Emph. added.]

So this was no partisan, ideological dispute; it was the lobbying that did it! That’s what I thought. The Investment Company Institute spent $16 million on lobbying during the first half of 2012, Bloomberg reports, compared to $16.7 million in all of 2011. Much of the effort was led by Christopher Donahue, CEO of Federated (the people who invented money market funds in the first place), who calls the funds the “eighth wonder of the world.” No, they’re not. They’re accidents of regulation. If, as Donahue says, new regulation would drive funds out of business, so what? The S.E.C. really needs to get a grip and properly balance the broader public interest against the needs of a sub-segment of a particular industry. One full-blown panic/run on the market is plenty. Let’s don’t make it so we might have to live through another. . . .