Slamming The Money Market “Gates” – Capital Controls Coming To $2.6 Trillion Industry

Tyler Durden's picture

The first time we wrote about the Volcker-led Group of 30 recommendation to crush Money Markets in January 2010 by effectively imposing capital controls and fund "gates", whose purpose was simply to scare investors out of the $2.6 trillion liquidity pool and force said capital to reallocate into a much more "reflation friendly" asset classes such as stocks, many were concerned but few took it seriously. After all, such a coercive push into a "free" market at the time seemed incomprehensible (if, in reality, turned out to be just a few years ahead of its time).

Fast forward two years to July 2012 when the same proposal of "risk-mitigation" by allocating a portion of the balance to a "loss-absorption fund", which would "create a disincentive to redeem if the fund is likely to have losses" was not only re-espoused by Tim Geithner, and the NY Fed but the SEC put it to a vote and the proposal would have almost passed had it no been for a nay vote by Commissioner Luis Aguilar opposing Mary Schapiro in the last minute. Still, once more many largely unconcerned about the implications behind this urgent push to intervene and establish pseudo-capital controls in this major source of potential stock buying "dry powder."

A few months later, following the coercive bail-in of Cypriot deposits, and the new "blueprint" for Europe bank rescues, whereby the authorities have strongly hinted that no more than the insured limit should be kept as as a deposit at a bank and it is preferred that the balance is invested in stocks or some other ponzi-enabling instrument, many have finally started to wonder if indeed there isn't some overarching strategy to "tax" financial assets in a world slowly but surely going insolvent and where the much desired debt inflation is so slow to materialize (just as we predicted would happen in September of 2011 in The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis").

Today, with a brand new leader, Mary Jo White, now that the clueless and co-opted Mary Schapiro is long gone, the $2.6 trillion Money Market Fund industry is one step closer to finally being gated. But don't it call it that - the SEC prefers the term "protecting investors"

From Reuters:

A portion of the $2.6 trillion money market fund industry would be required to fundamentally change how it prices its shares in an effort to reduce the risk of abrupt withdrawals, under a proposal released by U.S. regulators on Wednesday.


Funds could also charge withdrawal fees and delay return of funds to customers in times of financial distress, under the Securities and Exchange Commission's proposal.


The SEC plan comes after a long debate over whether changes made in 2010 were enough to avoid a repeat of a run on money market funds seen at the height of the financial crisis.

Naturally, those who see the writing on the wall - the MMF industry - is not happy:

The fund industry has warned that further major reforms could kill investor interest in money market funds.

Well, of course. After all this is the whole point. Recall what we said in July of 2012:

In a nutshell, money market funds (much more on this below), have always been one of the most hated liquidity intermediaries by the central planners: they don't go into stocks, they don't go into bonds, they just sit there, collecting no interest, but more importantly, are inert, and can not be incorporated into the rehypothecation architecture of shadow banking.


And perhaps that is precisely why the Fed is pulling the scab off an old sore. Recall that for the past year, our primary contention has been that the core reason for all developed world problems is the gradual disappearance of good collateral and money good assets.


Even if the MMF cash were to shift, preemptively, into bonds, or any other "safe" investments, the assets backing the cash can them enter the traditional-shadow liquidity system and buy time: the only real goal at this point. In the process, the cash itself would be "securitized" and provide at least a year or so in additional breathing room for a system that has essentially run out of good liquidity, and in Europe, out of any collateral.


Expect more and more efforts to disgorge the $2.7 trillion in money market funds as the world gets closer and closer to D-Day. And what happens with MMF, will then progress to all other real asset classes as the government truly spreads out its capital controls wings.

Funny: we said this 9 months before a capital control "disgorgement" struck in Cyprus. Fear not: it is coming to every other "taxable" financial asset. But whereas we thought the money market forced capital expropriation would be first, some places like Europe were so desperate they couldn't afford to wait that long.

So what proposals is the SEC planning on applying in order to enforce the capital reallocation pardon avoid investor losses? There are two, both perfect strawmen, and have been well-known since the first time we approached this topic three and a half years ago.

In a compromise move, the SEC's plan mostly focuses on prime funds for institutional investors, which are seen as more prone to runs because those investors are more sophisticated and more likely to pull large blocks of money first if there is a panic.


The SEC estimated that institutional funds represent 37 percent of the market with $1 trillion in assets.


The SEC's plan calls for two alternative proposals that it said could be adopted alone or in combination.


The first piece would require prime funds used by institutional investors to transition from a stable, $1 per share, to a floating net asset value (NAV) - a move designed to reduce the risk of runs like those during the financial crisis.


The SEC said that retail and government funds, which are not considered to be at the same risk for runs, would not have to move to a floating NAV. Retail funds are defined as those that limit shareholder redemptions to $1 million per day.


The industry has long fought against moving away from a stable share price, which it says is appealing to investors looking for a safe product.


The second proposal, meanwhile, would give fund boards for institutional and retail funds the authority to impose so-called "liquidity fees and redemption gates" during times of stress.


That would give funds the power to stop an outflow of investor money, an idea that the SEC's two Republican commissioners last year said they might be able to support.

We are not sure what is more amusing: that the SEC is so naive it thinks someone will actually believe it can prevent a capital run in a financial panic, or that its transparent attempt to spook money market investors away from their holdings now that the threat of imminent lock ups and gates looms over their heads is not what this is all about. We anticipate that the SEC will drop numerous analogies to Cyprus as a reminder that if something can be gated, it will be gated.

What is more important, is that unlike Schapiro's plan the current SEC proposal should have no difficulty in passing.

The initial industry reaction on Wednesday indicated the SEC's plan may not generate the same degree of opposition that the SEC faced last summer when then-SEC Chair Mary Schapiro called for what some consider stricter reforms.


Schapiro, who stepped down as SEC head last December, had advocated for a series of possible reforms, including capital buffers and redemption holdbacks, or a broader switch to a floating NAV - two ideas vehemently opposed by the industry.


She was unable to muster the votes needed to issue a proposal for comment after three of her fellow commissioners said they could not support her plan without additional study.


Schapiro's proposal was starkly different from what the SEC unveiled on Wednesday. This time, the SEC's plan contains some proposals that a few fund sponsors have previously said they could live with.


"It has been a journey to get to this point," said SEC Chair Mary Jo White, who took over the agency earlier this spring.

And if the industry is onboard, all the token SEC votes needed to enforce the plan will be in place.

At that point money markets will merely be the latest experiment in behavioral control: how to spook those with money in the multi-trillion industry enough to where they pull their cash and either spend it on trinkets, boosting inflation - a very welcome outcome for the Chairman - or merely investing it in the "stock market." Perhaps instead of a lock up, at times of crisis MMF investors will be given the opion of allocating funds to the Solyndra du jour (a la the Cyprus bank bailout) or lose all the money.

We are confident the central planners will find a way,

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fightthepower's picture

Fuck you Bernanke! Fuck you Rothschilds!

kliguy38's picture

relax and it won't hurt for long......after the first few centuries .....we should be used to it

Pladizow's picture

Qui Bono - I'm sure a very large % of those MMF's will be diverted to bank deposits which will then be leant out at a ratio of 9:1 through fractional reserve banking and ultimately Bailed In!

fonzannoon's picture

Much of those MMF's are in 401(k) accounts that cannot be withdrawn because somone is still employed. I bet Bartiroma herself lobbied for this so she can finally say she was right about cash on the sidelines coming into the market (at gunpoint).

LetThemEatRand's picture

Remember the days when putting your assets into an MMILF was not only free, but you'd get dinner out of the deal?  

markmotive's picture

When the MM smackdown actually happens we will have fucking anarchy. Madness in the streets. MM locked down, bank accounts frozen. The whole system will freeze.

Meanwhile, babies still shit their diapers, winter is still cold and your leaky roof still needs fixing. How long can a father watch his children starve until he decides to knock over a grocery store? And when the cops don't show anymore because they're not getting paid, how long can the grocery store owner watch angry men steal his livelihood?

Better know how to survive when shit hits the fan.

TwoShortPlanks's picture

Money Markets?...Mirage Markets!

Potemkin Intelligence hides the Global Ponzi Wealth Mirage

Every economist knows that the quickest, easiest and best result when aiming to raise Money Velocity is to increase general wealth. The best way to do that is to target the wealth of the middle class, and the middle class’s single most valuable asset is their home. Boost housing prices and you boost wealth perception and this increases consumer confidence…blah, blah, blah. Of course wealth is completely subjective and relative to something else of perceived value, something else with which a home owner can gauge and measure wealth, magically tucked away under their roof, a gauge such as currency. This is the Western Potemkin Intelligence, it is an ego which overpowers common sense and fights the obvious truth, hidden in plain view, that the illusion of prosperity is nothing more than a wealth mirage trapped within a fractional reserve debt based monetary system, of a Global Ponzi Paper System. Keynes’s ‘Animal Spirits’ fight and toil within a fictional banking fog, nothing more. But as the Golden sun rises in the East that fog will disappear, and with it clarity. We will come to realise the desperation of our situation, that we have been duped, abandoned and lost in a desert of paper wealth, still indoctrinated by western conditioning and bias, like some slow lumbering chain gang we will stagger, shackled to each other in mere paper bonds we stupidly believe to be hardened steel…pathetic! In stark contrast, ultra-wealthy elite have been accumulating physical Gold behind the scenes since the 1970’s.


ImReady's picture

I sold out of all funds in my 401k recently and have it sitting in the MMF within the plan. Looks like it's time to cash out and take the tax hit. These actions by the SEC are making  it much more palatable to do so. A no brainer really...

fonzannoon's picture

Are you currently employed with the same company that you have the 401(k) with or is it an old 401(k) that you left at an old job? Cause if it is your current plan you may not like the answer you get when you try to do that.

ImReady's picture

I own the company. If they don't want to give me MY money I will close out he plan.

fonzannoon's picture

My guess is that is exactly what will happen. Good for you, give em hell.

Hey Imready, I was just thinking. Ask your provider about instituting an "in service withdrawal" provision in the plan. you may have to move to a new provider if they won't add it. But there are plans out there that will allow it. good luck.

CheapBastard's picture

I once met one of the Tip-Top litigators in Fort Worth years ago. He said, "When someone smiles, puts out their hand and says, 'You can trust me,'" better run the other way.

Ranger4564's picture

You can quite often transfer your money out of a 401K / IRA plan and cash out, or rollover to another IRA, such as a self-directed IRA. About 4 years ago, I closed my Vanguard and MFS fund investments (gradually over a year) and moved them to a self-directed IRA which I exchanged into Gold and Silver Bullion at a depository. Sterling-Trust is one such Custodian that will maintain your self-directed IRA, then they use a depository as the holder... Delaware something or other was the depository. Great thing is, you can close your IRA, pay the fees, and get the physical metal or cash delivered to you. I closed my IRA about a year ago, just finished paying the tax hit in the 2013 tax bill. They delivered the gold and silver I had invested, physically to me, as requested.

You can also look into opening your own LLC / LLP which is allowed to hold your IRA cash, and you can hold gold / silver in that framework... I don't know much about this, but one of my colleagues went this route with his IRA... started the LLC / LLP, transferred money from the IRA to his LLC / LLP, used the money to buy gold / silver. It's considered to still be in the IRA / 401K system.

I told that colleague, that legal constraints may make it more painful to ever withdraw the gold / silver... but this individual might in the end, end up paying less in taxes than I did.  My hit was 28% plus 10% penalty, I believe.


August's picture

Over the last three years I totally distributed all of my retirement plan assets.  It feels good, now that all the checks have been sent in to Uncle Sugar.  I got a nice note saying that they'd put my name on a MOAB of my own

GAAP is crap's picture

banks lending?  to each other maybe.  Nah...this is going into treasuries and shadow banking.  that money market or "cash" account in your 401k...treasuries.


Urban Redneck's picture

The MMFs assets are already leant out (rehypothecated) at a ratio of XX:1, just to maintain equilibrium (status quo) far more than $1 trillion will have to be printed.

Ghordius's picture

which goes back to the hidden elephant in the room in this MFF discussion: interbank lending

Urban Redneck's picture

The suicide pact of the circular firing squad.  They can gate and print to prop up interbank lending over the short term, but only if they actually and finally write down derivative claims, otherwise the amounts make the Wiemar experiment look the antiquated product of a manually operated Gutenberg press.  I don't think even the Italians- with their yearning for and fond memories of 1000 lira toilet paper would stand for that.

The_Dude's picture

Jeff...please go back to watching John Stewart to get your news and leave the adults to talk.....

Jeff Lebowski's picture

Obviously, you're not a golfer.

Sad. I've been here for nearly four years and you still need to /sarc clearly sarcastic comments.

Bearwagon's picture

No, you don't. Come on, man up! ;-)

SRSrocco's picture

This is exactly what I am talking about.... increasingly worthless paper assets going forward.  The best protection is in physical assets such as gold and silver:

The Greatest Fundamental Reason to own Precious Metals
Urban Roman's picture

Let's see ... they're worried about deflation, that is, worried about the "velocity" of money. They think it might not change hands often enough to keep the economy going. 

So they put barriers in its way!?

ParkAveFlasher's picture

MMF is where money pools, not moves.  

Ranger4564's picture

Yeah, but it sounds like the intent is to stop people from taking out large sums of money all at once. So it's not that they want it moving, they don't want it withdrawn all at once.

MFLTucson's picture

Identical to what the Jewsih Bankers did to the German economy now known as the Weimar Republic.

The Wedge's picture

The Wiemar Republic ran up a sizable debt during the war and the allies forced them to pay heavy reparations. This and many other factors led to hyperinflation and then to the rise of Hitler.

In 1921, the Allies set Germany's reparations at 132 billion goldmarks (pegged at the value of the mark in 1913). From then until 1932 an estimated 26 billion goldmarks was paid out in cash and goods, corresponding to an annual 10 percent of national income. In other words, although the burden was considerable, it was more-or-less affordable.

It was less the size of its reparations than continued uncertainty about them that destabilized the Weimar economy. The mood was especially vitriolic within the Reparations Commission, with the French --- keen to exact revenge for their military defeat in 1871 -- proving completely intransigent.

It therefore took just a relatively minor delay in the delivery of wood, coal and telegraph poles to escalate the conflict, and in January 1923 France marched 100,000 soldiers into Germany's Ruhr valley, seized control of the mines, and confiscated the coal. "This was a fatal blow to German industrial production," Holtfrerich says.

An entire region ground to a halt, and an important source of tax revenues dried up. Because the Ruhr valley was no longer permitted to deliver coal, Germany was forced to obtain its fuel elsewhere -- often from abroad at great cost, depleting its much-needed foreign currency reserves.

Millions, Billions, Trillions: Germany In The Era Of Hyperinflation

Alexander Jung


BeetleBailey's picture

DOWN with the government.


There...I said it.


Fuck em.....bastards, liars, pigs, power mad cunts the lot of them.....

Richard Chesler's picture

Corrupt in-your-face.

Now that's transparency you can believe in.

max2205's picture

Funny I dont see how this rule would prevent will make a run before it becomes a rule...


Fucking morons

G-R-U-N-T's picture

"many have finally started to wonder if indeed there isn't some overarching strategy to "tax" financial assets"

There's no wondering about it. Once private cash can no longer pay the bills they will come after our assets! They will do anything to keep power and control these idiots will, indeed, burn the village down to save it!

It has to crash and burn so a new business cycle can begin! Unfortunately there will be a tremendous amount of pain to be endured, look at Southern/Northern Europe, Turkey and Germanies economic growth is sliding. Soon the wave of civil unrest, birth pangs of change, will swell to the west as more confiscation, more unemployment, more regulatory controls, ad infinitum...because politicians haven't a clue what they are doing as their policies testify. The Fed was suppose to stabilize the idiocy that came out of the legislature but it has no more magic to pull out of the hat.

Marxism never ever has worked and these dumb shits that continue to believe in failure haven't the brains to learn from history. It's fuckn' pathetic! So here we are at the downturn and within the next few years the true residue of what these numskulls in Europe, Washington, and their bureaucrats with all their idiotic brilliance,prestigious academic sophisticated nonsense will have caused the greatest bankruptcy that the world has ever seen! When government gets involved and begins thinking they know something about economic trade, while creating policy to manipulate it, this is always the end result, collapse!


Yes_Questions's picture



No one may ever see the beauty of your avatar in this, little thread, but I do.


And + on the post too.

knukles's picture

Law of Unintended Consequences

Hypothetically.  Everybody here on the Hedge has all their money in MMMFs.  Panic hits.  Gold goes to $250/oz and S&P to 600, 30 year treasuries to 18%.
Disaster in every single market there is, world wide.

All Hypothetical...

And so all the smart folks here on the Hedge, try to redeem all their money from the MMMFs to buy the assets at the BARGAIN of a lifetime.

And they make us stay in the MMFs

Talk about "cash on the sidelines"
All Hypothetical

Except this:
Fucking Idiots.

Meat Hammer's picture

When they say "our financial system" that's exactly what they mean.

RockyRacoon's picture

Clever.  So, you're saying it's a closed loop.  I like it.

HardAssets's picture

Better to study criminology than economics/finance. 

The con man/robber already thinks your money, is 'his'.

All the legal & economic gibberish they spout is pure crap. Their objective is to get your money so they can cover themselves a little while longer. And at a higher level (beyond politicians & even most big financial players) the objective may be to bankrupt you and make you dependent so the New World Order can be implemented. Welcome to the new global serfdom.

Urban Redneck's picture

quality collateral availability, asset encumbrance, and the velocity delta (which this action only addresses within MMFs as opposed to systemically)...

Luke 23:34

fonzannoon's picture

it seems from reading more that "government money market funds" will be exempt from this. Basically, if you are in U.S debt, you have no worries.

Urban Redneck's picture

Tell that to people who were in the Reserve FundSSSSSSS last time around - US government debt is no safer than any other for a MMF, even the .gov only funds got locked up until maturity of the fund assets.  

fonzannoon's picture

Getting locked up until the maturity would be a privilage this time around.

Urban Redneck's picture

Or a lost opportunity, particulary if velocity does pick up in the interim (which can be extended by litigation).  You might be better offl buying treasuries directly yourself, then you at least could have them wired to a bank that's open for business and collateralized for a shopping spree.


aphlaque_duck's picture

The issue is private debt leveraging.

Money markets funds, being a cash equivalent, can be used as collateral against which further cash equivalents are loaned. This creates a fractional reserve, money multiplier effect just like when banks lend for mortgages. Tons of debt is accumulating in the "shadow banking system" in this manner - the risk is some day people will try to redeem that debt to buy stuff and this would kick off yet another systemic crisis or currency failure. 

Trying to find some links for you, I just found this paper which looks to be from this year:

Google: money market funds private debt leveraging money multiplier


oc's picture


 how'd you get a pic of my front gate ?

greatbeard's picture

Your front gate?  Heh, that's my back gate.

sunaJ's picture

I have a good idea of outflow for these MMF MFers...How about gold and silver? It just "sits there inert," and the great thing is you possess it if you are smart. It is, after all, REAL money...problem solved for you, and an extremely egregious problem for the fascist financiers.

Manthong's picture

"that's my back gate."

it looks just a skoshe smaller than the gate on my dog run.