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• W3126087887 abstract "The 2008 Financial Crisis dramatically highlighted the systemic vulnerabilities of the multi-trillion dollar Money Market Mutual Fund (MMF) industry, which developed over the last 40 years as a vital part of the U.S. financial system. Yet, more than 5 years on, the problem of what to do with MMFs remains unsolved, with no broad consensus in development regarding the best way to address the systemic risks posed by these funds. This Article develops a three-part framework to assess the efficacy of existing reform proposals, in the hope of pointing to new directions. First, I analyze the structural susceptibility of MMFs to runs, as well their role as a vector for systemic risk via contagion. Concluding that MMFs' run-fragility and contagion risks derive from maturity mismatch, coupled with the behavioral dynamics of short-term investors, I argue for the necessity of public support measures for effective reform. Furthermore, any MMF regulation must aim to avoid or limit moral hazard, especially if public support is necessary. I argue that this should be done by internalizing systemic risk costs through ex-ante private payments that are risk-assessed. Finally, I argue that MMF structural reform must take into account meaningful differences between such funds and bank deposits. To the extent MMFs play a conceptually distinct role in the modern financial system that cannot be perfectly substituted by bank deposits, modifying the structural attributes of MMFs that compromise their ability to perform that role would have unintended economic costs and real migration risks.Applying this framework, this Article shows how recent proposals by the SEC and FSOC are fundamentally flawed, as they fail to address the structural weakness created by maturity mismatch and, thus, cannot effectively prevent runs of the scale experienced in 2008. On the other hand, alternative proposals such as deposit-style insurance and narrow purpose banks address both the run and contagion problems but have considerable difficulty mitigating moral hazard costs and migration risk. Given these constraints, this Article concludes with a unique proposal for a Public-Private Liquidity Fund (PPLF) as an optimal paradigm of reform.Introduction You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things that you think you could not do before.Money Market Mutual Funds (MMFs)2 have developed over the last 40 years as an important part of the U.S. financial system. As redeemable mutual funds with a stable net asset value (NAV) of $1.00,3 MMFs have served and continue to serve a vital cash-management function for individual investors, institutions, and governments. In turn, MMFs invest in short maturity and low-risk credit instruments and are themselves a crucial source of short-term credit and liquidity in the U.S. economy. MMFs thus make up an essential component of short-term funding markets, as a stable alternative source of funding to banks. As an indication of their systemic importance, MMFs had about $3.8 trillion in assets under management (AUM) as of the end of 2008, representing nearly a quarter of all U.S. mutual fund assets.4The 2008 financial crisis dramatically highlighted the structural vulnerability of the MMF industry to systemic risk in the form of runs. At the onset of the crisis in 2007, dozens of MMFs were faced with substantial losses due to holdings of assetbacked commercial paper (ABCP), which had significant exposure to the U.S. subprime mortgage market. The consequent downturn in the financial markets placed further strains on the short-term debt markets in which MMFs operate. As the financial crisis reached its zenith with the bankruptcy of Lehman Brothers Holdings, Inc. (Lehman) in September 2008, Reserve Primary Fund, a $62 billion MMF holding $785 million in exposure to Lehman commercial paper (CP), was subject to a run by investors, with redemptions totaling $40 billion in just two days. …" @default.
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• W3126087887 date "2013-10-01" @default.
• W3126087887 modified "2023-09-23" @default.
• W3126087887 title "Untangling the Money Market Fund Problem: A Public-Private Liquidity Fund Proposal" @default.
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