Risks of money-market funds

The following editorial appeared in the Kansas City Star on Thursday.

As the financial crisis intensified in September 2008, the value of a money market fund fell below the $1 value that such funds strive to maintain. The federal government was forced to step in with a temporary guarantee, which averted a destabilizing run that would have worsened the panic gripping financial markets.

It was only the second time in the four-decade history of such funds — typically offered in brokerage accounts — that a money-market fund’s value had “broken the buck,” or dropped below $1. It was a lesson for many investors that such accounts aren’t risk free.

Now, Securities and Exchange Commission Chairman Mary Shapiro has proposed a plan to make that lesson more clear while reducing the risk that taxpayers would have to finance another money-fund bailout.

Her proposal would give money-market funds a choice. They could set aside a small capital reserve and impose restrictions on withdrawals, or they could allow a fund’s value to fluctuate. The industry is strongly opposed to this plan because it might prompt many investors to withdraw money. To go into effect, the plan must be endorsed as a formal proposal by three of the five SEC commissioners, then adopted later in a second vote.

Some brokerages offer money accounts that are effectively bank deposits backed by the Federal Deposit Insurance Corp., but others do not. Many investors are unaware their cash accounts aren’t guaranteed.

One of the main lessons of the panic of ’08 was the ruinous cost to the taxpayers of concealing risk. Shapiro’s plan would make risk more apparent so investors could make decisions accordingly — rather than in ignorance, and rather than blithely assuming any risk has been transferred to the taxpayer.