Stephen Foley: Money market funds and the hidden bailouts


US Outlook: The Securities and Exchange Commission revealed this week that it knew of 300 separate occasions where money market funds, an ultra-conservative type of mutual fund that millions of Americans use like they are bank accounts, have had to be quietly bailed out by their sponsoring broker since the products were invented in the Seventies.

It would be reputational death, not just to any particular fund but to the broker itself in all likelihood, if a money market fund's shares fell below par and savers lost some of their money. When that happened to the Reserve Primary fund the day after Lehman Brothers collapsed in 2008, the redemptions brought the fund to its knees and the publicity prompted a flight of capital out of money market funds.

I have written here before about why that little-understood aspect of the credit crisis was one of the scariest, not least because some of the world's largest corporations rely on money market funds for the short-term loans they use to pay workers and suppliers. Such an important part of the payments system should not be prone to runs.

But it is only fair for savers, too. There is no legal obligation for sponsoring brokers to bail out their funds, despite the false sense of security savers might get from those 300 histories. The SEC is desperately trying to introduce reforms that might force sponsors to put up capital in advance to absorb potential losses, instead of leaving savers to rely on there being enough money in the sponsor's kitty on the day disaster strikes. We will all be safer if the regulator gets its way.