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Markets and the Economy


Money market a not-so-safe haven

(guest essay)

by

Michael A. Rogawski

April 13, 2008

The auction-rate securities debacle (see Gretchen Morgenson in New York Times, April 13) is largely the result of the failure of the S.E.C. to require market transparency. The rate-setting auctions are conducted in secret. None of the details of the auctions--not even the final rates--are publicly disclosed, so the natural forces that discipline markets are subverted.

A much larger and potentially far more catastrophic accident is waiting to happen in money market funds. Assets in money market funds are $3.5 trillion with tax-exempt money fund assets at $494 billion. Loss of confidence could cripple the economy.

For many money funds, it is impossible for the public to assess the risks that illiquidity will occur. The managers of these funds typically advertise that they invest in “high-quality short-term securities” and they provide a sketchy list of portfolio holdings each quarter. What they don’t tell you is that the safety and liquidity of most of the holding are dependent upon a bank or other financial institution. Tax-exempt money funds use variable rate demand obligations; their liquidity depends upon the ability to re-market the instrument or, ultimately, on the creditworthiness of the institution that provides backup liquidity.

Fund managers do not disclose sufficient information about each security in fund portfolios to allow one to assess a fund’s compliance with stated objectives. This raises the risk that problems in individual funds would undermine investor confidence in the entire industry.






Markets and the Economy

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