POOR RICHARDS REPORT
Money Market Funds
“There is no such thing as a free Lunch”
POOR RICHARDS REPORT
Money Market Funds
“There is no such thing as a free Lunch”
Way back when Merrill Lynch Pierce Feener and Smith were the top firm on Wall Street, they used their combined creativity to come up with the idea of a daily interest paying money market fund for their special accounts.
Soon everyone was ready to copy them, especially after a major institutional brokerage firm got hit for a million dollar withdrawal. It was paid and the fund maintained the $1. ( It was rumored that the partners came up with cash to maintain the dollar price.)
After that the new industry was off and running with the blessing of the SEC and other banking authorities. No one gave serious thought to the savings bank industry. They paid interest quarterly – not daily.
The Savings Banks operated under very strict rules, where initially the public trust came first and foremost. It was for the general public good. But the computers were fast changing the way “the street” could do business. No one thought long term, probably because the higher priced lobbyists outfoxed the savings industry representative.
Moneys quickly left savings banks as investors sought competitive rates on a daily basis.
I can not figure out why they did not let the savings banks have money market funds too.
They would have paid a different rate too.The government also started The Federal National Mortgage Association (Fannie Mae) where banks could turn over their mortgages to a government agency that had IMPLIED GUARANTEES (GSE’s Government Sponsored Enterprise’s).
WE NEED A CZAR WHO CAN SETTLE DISPUTES BETWEEN AGENCIES.
The theme here is that it would help all the people whether they could qualify or not under normal procedures. Savings banks were now down to buying legal corporate A rated debt(legal) or better. Why should the banker take a on a risky mortgage when he can dump on the government at tax payers expense?
So lets go fast forward a few decades. The Housing bubble has burst along with Fannie Mae and his sister. Savings banks are now buying 100% Treasury Bills and a mortgage is hard to come buy. The money market funds have been buying Trillions of short term debt sponsors by national central banks because the industry is so large and the economy is so weak that short term corporate debt is a sign of weakness- or the debt is too small to be meaningful.
Before anyone knew it Greece and Portugal were having financial problems. This forced major countries to try to help them. Why? Because their banks owned the debt and would fail. So all the problems going on with the Euro has to do with no one regulating and administering to the Money Market funds. Almost anyone can start one and those little fees add up when you are taking in hundreds of millions.
There will be a day soon when the economy is considered strong enough to allow the funds to “break a buck”.
This means that most will trade below $1.00 and a few might go above $1 which would invite a liquidating of orders.
So if you own a money market fund sell. Go to cash. Cash is king. When one has cash one can act on a moment’s notice.
Remember; we might see a day when there is no opening quote- just the letters BW ( Bid Wanted).
During a panic, some stocks might open up at ½ of book value for an initial trade before the smart investors wise up.
Addendum:
The July 24, 2014 FINANCIAL TIMES page 30
SEC APPROVES MONEY FUNDS REFORM
Some face move to floating share price
Bid to prevent runs on the instruments
It took two years and the vote was 3-2 when it should have been 5-0. These are public monies in these funds.
Secondly, banks should not borrow money themselves. They should be debt free.
Thirdly, it is my humble opinion that they are giving the funds to get their “house” in order or it is time to liquidate the fund entirely.
Fourthly, they will be allowed to charge a fee upon redemption which goes against the original intentions.
This will not be a simple procedure or an easy process when you have over 900bn ‘prime’ funds that will be affected by the changes.
Again, these all favor the big wigs. This sucks!
Dump your money market funds as fast as you can.
Cash is king
Do not depend upon the Legal system to bail you out.
The Law should be above Politics.
New York State Court of Appeals was known as the second best court of the Land. The reason is because until the last 20 years, it never had a decisions reversed by the US Supreme Court.
The reason for this was simple.
In each county when a judgeship was available the attorneys would meet and the potential judges would make their names known. All qualified attorneys belonged to the local Bar Association. They would meet and vote who they believed was the most qualified among them.
Then that candidate would be endorsed by the parties who represented in the Bar Association. They ran unopposed because in theory the LAW was above Politics. For higher judgeship’s the same process was done except the county officer of the Bar Association would vote. Endorsement by the association meant that candidate would run unopposed.
Today, endorsement by the American Bar Association means very little. It is all politics. Very seldom does the US Supreme court have a unanimous decision. They are usually 5/4 split decisions.
Instead of deciding on the merits of the law, they are trying to make laws. That is suppose to be the function of Congress. The Congress makes the law and the Supreme Court validates the law or declares it unconstitutional and sends it back to the Congress.
Since computers and the internet have brought nations closer together we must now work together on a legal system that is fair and just to everyone. In a true democracy the minority is given due consideration providing they are not preaching total destruction of the system.
Members of the liberal and conservative factions of the political parties must unite on the selection of judges. Often Judges have to make decision in cases where they have little expertise and must rely on honest consultation among their peers.
What better way than to be chosen by your peers with the understanding that one will act impartially or face disbarment.