WASHINGTON - Treasury Secretary Tim Geithner said Thursday a stymied plan by U.S. regulators to reform money market mutual funds must be allowed to move forward.
In his second appearance on Capitol Hill in two days, Geithner told Senate Banking Committee members that a proposal by the Securities and Exchange Commission should be released to the public for comment as soon as possible, warning that such funds remain vulnerable to potential runs in the event of another financial crisis.
"My own judgment is that the SEC needs to go further, they can go further and that we should get on with the business of letting them expose to the world and to the markets a set of options that the world can comment on and help refine," said Geithner. "I think it's important that the SEC propose a range of options for how to go forward in this so that the market can assess those and comment on them and the SEC and others can reflect on what that means for trying to get this balanced right."
His comments marked another push by the Obama administration to prod the SEC to move ahead on releasing a draft proposal, which has been delayed due to gridlock among the agency's commissioners. The plan would outline different approaches the SEC could take to address money market mutual fund reform, including using a floating net asset value rather than the current practice of fixing the value at $1 per share. During the height of the financial crisis in 2008, the oldest money market fund broke the buck and forced the government to guarantee $3.5 trillion in money funds.
"I still believe, as does the SEC and the Fed, that [money market mutual funds] are still vulnerable to runs that cannot just disadvantage the investors, but could hurt the system as a whole," said Geithner at the hearing.
The issue also served as a focal point of last week's Financial Stability Oversight Council meeting, which Geithner chairs. During the public portion of the meeting on June 18, Geithner said one of the top issues of the interagency council was to resolve "challenges remaining in the money market funds."
He was joined by Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, who asked a Treasury official to read out loud part of the FSOC report endorsing the release of the SEC's plan. Much of the discussion between regulators at the meeting appeared scripted-and was designed to send a message to the mutual fund industry, observers said.
"I think they're really trying to get the money market fund industry to the SEC table by threatening some sort of systemic action, which they can do," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics Inc. "It was a somewhat a ritualized act of political theater designed to make a point."
Under the Dodd-Frank Act, FSOC could designate the entire mutual fund industry as systemically important, or choose individual firms.
Sen. Bob Corker, R-Tenn., alluded to such a possibility at the hearing Thursday, telling Geithner: "It seems to me we still haven't quite come to the right conclusion on the money markets and if the SEC doesn't take action, I think the FSOC can."
At the FSOC meeting, SEC Chairman Mary Schapiro stressed the importance of moving forward in the rule making process.
"My view is that it's very important for these approaches to get out into the public domain in a concrete way so we can receive informed meaningful feedback to help guide our ultimate decision," said Schapiro. "I also believe that the issues that are posed by money market funds, any impact of a failure of money market funds on a broader economy really necessitate our continued attention, but these issues have to be confronted."
Her concerns are clearly shared by other regulators, who appear eager for the SEC to make headway soon.
"Important steps were taken by the SEC to strengthen the money market funds, and I recognize those were very useful steps, but the work that the SEC has done, the consultations with the industry, with the public, the economists who performed analysis of this industry suggests that more needs to be done, and I'm very supportive of the efforts that the SEC is undertaking," said Federal Reserve Chairman Ben Bernanke at the council's meeting.
Schapiro in recent months has defended her calls to revamp the $2.6 trillion U.S. industry, arguing it remains a risk to the financial system. Both the Fed and Treasury officials have joined Schapiro in calling for additional overhauls, despite safeguards that were introduced in 2010.
Those reforms were stop-gap measures, however, and regulators remain troubled by the potential for another run.
. "I continue to be concerned as is discussed in the annual report that money market funds remain vulnerable to runs," said Schapiro at the meeting last week.
The SEC chairman has recommended two alternative reforms to address remaining structural vulnerabilities. For one, funds could be required to float their net asset values, an idea opposed by many in the mutual fund industry. Alternatively, funds could be required to hold a capital buffer in order to absorb losses along with placing restrictions on how much investors can redeem shares at one time.
"There really is no mechanism to absorb sudden loss in the value of a portfolio security of a money market fund without threatening that stable one dollar net asset value," said Schapiro. "And secondly, investors remain incentivized to redeem their money market fund holding at the very first sign of a problem."
Bernanke told Schapiro the issue was critical.
"I hope you are able to put out a rule, and if that transpires, it will be interesting to see what the feedback is and look forward to some steps that will ensure a more stable industry in the future," he said.