Should we risk another 2008 financial meltdown? The answer is no. However, late last month the Securities and Exchange Commission (SEC) abandoned efforts to impose new regulations on money market funds intended to prevent another panic like the one that occurred then. Because money market funds are typically invested in short-term, low-risk assets (like United States Treasuries and highly rated commercial paper), they are considered to be ultra safe investments, as well as mainstays of all the major mutual funds. However, when Lehman Brothers collapsed and their commercial paper became worthless, this set off a frenzy where funds were frantically trying to unload commercial paper and other assets to raise cash and major corporations, relying on commercial paper for day-to-day operations,found themselves unable to issue new securities. The Treasury and Federal Reserve officials came to the rescue and backed money-market fund assets in their entirety by the full faith and credit of the United States, but vowed not to do it again.
1. By what percentage does the money market bailout dwarf the TARP bailout?
2. What are the implications, if the Treasury and Fed had not acted?
3. What are the two major reforms that the SEC proposed to prevent this from happening again?
4. Why do you think the SEC abandoned these reforms?
Stewart, J.B. (2012). Influence of Money Market Funds Ended Overhaul. The New York Times, Sep. 7 (Retrievable online at http://www.nytimes.com/2012/09/08/business/sorting-out-the-collapse-of-new-rules-for-money-market-funds.html)