• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied - The Sequel

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Two years ago, in January 2010, Zero Hedge wrote "This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied" which became one of our most read stories of the year. The reason? Perhaps something to do with an implicit attempt at capital controls by the government on one of the primary forms of cash aggregation available: $2.7 trillion in US money market funds. The proximal catalyst back then were new proposed regulations seeking to pull one of these three core pillars (these being no volatility, instantaneous liquidity, and redeemability) from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal would give money market fund managers the option to "suspend redemptions to allow for the orderly liquidation of fund assets." In other words: an attempt to prevent money market runs (the same thing that crushed Lehman when the Reserve Fund broke the buck). This idea, which previously had been implicitly backed by the all important Group of 30 which is basically the shadow central planners of the world (don't believe us? check out the roster of current members), did not get too far, and was quickly forgotten. Until today, when the New York Fed decided to bring it back from the dead by publishing "The Minimum Balance At Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market FUnds". Now it is well known that any attempt to prevent a bank runs achieves nothing but merely accelerating just that (as Europe recently learned). But this coming from central planners - who never can accurately predict a rational response - is not surprising. What is surprising is that this proposal is reincarnated now. The question becomes: why now? What does the Fed know about market liquidity conditions that it does not want to share, and more importantly, is the Fed seeing a rapid deterioration in liquidity conditions in the future, that may and/or will prompt retail investors to pull their money in another Lehman-like bank run repeat?

Here is how the Fed frames the problem in the abstract:

This paper introduces a proposal for money market fund (MMF) reform that could mitigate systemic risks arising from these funds by protecting shareholders, such as retail investors, who do not redeem quickly from distressed funds. Our proposal would require that a small fraction of each MMF investor’s recent balances, called the “minimum balance at risk” (MBR), be demarcated to absorb losses if the fund is liquidated. Most regular transactions in the fund would be unaffected, but redemptions of the MBR would be delayed for thirty days. A key feature of the proposal is that large redemptions would subordinate a portion of an investor’s MBR, creating a disincentive to redeem if the fund is likely to have losses. In normal times, when the risk of MMF losses is remote, subordination would have little effect on incentives. We use empirical evidence, including new data on MMF losses from the U.S. Treasury and the Securities and Exchange Commission, to calibrate an MBR rule that would reduce the vulnerability of MMFs to runs and protect investors who do not redeem quickly in crises.

And further:

This paper proposes another approach to mitigating the vulnerability of MMFs to runs by introducing a “minimum balance at risk” (MBR) that could provide a disincentive to run from a troubled money fund. The MBR would be a small fraction (for example, 5 percent) of each shareholder’s recent balances that could be redeemed only with a delay. The delay would ensure that redeeming investors remain partially invested in the fund long enough (we suggest 30 days) to share in any imminent portfolio losses or costs of their redemptions. However, as long as an investor’s balance exceeds her MBR, the rule would have no effect on her transactions, and no portion of any redemption would be delayed if her remaining shares exceed her minimum balance.

 

The motivation for an MBR is to diminish the benefits of redeeming MMF shares quickly when a fund is in trouble and to reduce the potential costs that others’ redemptions impose on non?redeeming shareholders. Thus, the MBR would be an effective deterrent to runs because, in the event that an MMF breaks the buck (and only in such an event), the MBR would ensure a fairer allocation of losses among investors.

 

Importantly, an MBR rule also could be structured to create a disincentive for shareholders to redeem shares in a troubled MMF, and we show that such a disincentive is necessary for an MBR rule to be effective in slowing or stopping runs. In particular, we suggest a rule that would subordinate a portion of a redeeming shareholders’ MBR, so that the redeemer’s MBR absorbs losses before those of non?redeemers. Because the risk of losses in an MMF is usually remote, such a mechanism would have very little impact on redemption incentives in normal circumstances. However, if losses became more likely, the expected cost of redemptions would increase. Investors would still have the option to redeem, but they would face a choice between redeeming to preserve liquidity and staying in the fund to protect principal. Creating a disincentive for redemptions when a fund is under strain is critical in protecting MMFs from runs, since shareholders otherwise face powerful incentives to redeem in order to simultaneously preserve liquidity and avoid losses.

Basically, according to the Fed, the minimum balance would make the financial system more fair, reduce systemic risk and protect smaller investors who can be left with losses if larger investors in their fund withdraw cash first. The proposal would require a "small fraction" of each fund investor's recent balances to be segregated into a sinking fund to absorb losses if the fund is liquidated. Subsequently redemptions of these minimum balances at risk would be delayed for 30 days, "creating a disincentive to redeem if the fund is likely to have losses." In other words: socialized losses. Where have we seen this before?

But the real definition of what the Fed is suggesting is: capital controls. Once this proposal is implemented, the Fed, or some other regulator, will effectively have full control over how much money market cash is withdrawable from the system at any given moment. At $2.7 trillion in total, one can see why the Fed is suddenly concerned about this critical liquidity and capital buffer.

The problem is that just as we said over two years ago, a brute force attempt to preserve a liquidity buffer is guaranteed to fail, as MMF participants will simply quietly pull their money out at the convenience when they can, not when they have to. Europe had to learn this the hard way - only after Draghi cut the deposit rates to 0% did virtually every European money market fund become irrelevant overnight, resulting in a massive pull of cash from the MMF industry. However, instead of going into equities as the Group of 30 and other central planners had hoped, the hundreds of billions of euros merely shifted into already negative nominal rate fixed income instruments. And who can blame them: money market capital does not seek return on capital but return of capital, to borrow Bill Gross' favorite line.

Another clue as to why the Fed is once again suddenly interested in money markets comes from an article we wrote back in September 2009: "Rumored Source Of Reverse Repo Liquidity: Not Bank Reserves But Money Market Funds" in which we said that, "the Chairman is rumored to be considering money market funds as a liquidity source. Reuters points out that the Fed would thus have recourse to around $4-500 billion, and maybe more, of the $3.5 trillion sloshing in "money on the sidelines", roughly the same amount as MMs had just before the Lehman implosion."

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 triliion 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.

* * *

For a more nuanced read through of the implications of money market redemption denials, we suggest rereading our analysis of precisely this topic from January 2010. Just keep in mind: in the interim we have had two and a half years of ZIRP and NIRP based asset depletion, which means that the marginal requirement to get MMF cash "back" into the system is now higher than ever.

This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied

When Henry Paulson publishes his long-awaited memoirs, the one section that will be of most interest to readers, will be the former Goldmanite and Secretary of the Treasury's recollection of what, in his opinion, was the most unpredictable and dire consequence of letting Lehman fail (letting his former employer become the number one undisputed Fixed Income trading entity in the world was quite predictable... plus we doubt it will be a major topic of discussion in Hank's book). We would venture to guess that the Reserve money market fund breaking the buck will be at the very top of the list, as the ensuing "run on the electronic bank" was precisely the 21st century equivalent of what happened to banks in physical form, during the early days of the Geat Depression. Had the lack of confidence in the system persisted for a few more hours, the entire financial world would have likely collapsed, as was so vividly recalled by Rep. Paul Kanjorski, once a barrage of electronic cash withdrawal requests depleted this primary spoke of the entire shadow economy. Ironically, money market funds are supposed to be the stalwart of safety and security among the plethora of global investment alternatives: one need only to look at their returns to see what the presumed composition of their investments is. A case in point, Fidelity's $137 billion Cash Reserves fund has a return of 0.61% YTD, truly nothing to write home about, and a return that would have been easily beaten putting one's money in Treasury Bonds. This is not surprising, as the primary purpose of money markets is to provide virtually instantaneous access to a portfolio of practically risk-free investment alternatives: a typical investor in a money market seeks minute investment risk, no volatility, and instantaneous liquidity, or redeemability. These are the three pillars upon which the entire $3.3 trillion money market industry is based.

Yet new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to "suspend redemptions to allow for the orderly liquidation of fund assets." You read that right: this does not refer to the charter of procyclical, leveraged, risk-ridden, transsexual (allegedly) portfolio manager-infested hedge funds like SAC, Citadel, Glenview or even Bridgewater (which in light of ADIA's latest batch of problems, may well be wishing this was in fact the case), but the heart of heretofore assumed safest and most liquid of investment options: Money Market funds, which account for nearly 40% of all investment company assets. The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal." This is precisely the regulation now proposed by the administration. In essence, the entire US capital market is now a hedge fund, where even presumably the safest investment tranche can be locked out from within your control when the ubiquitous "extraordinary circumstances" arise. The second the game of constant offer-lifting ends, and money markets are exposed for the ponzi investment proxies they are, courtesy of their massive holdings of Treasury Bills, Reverse Repos, Commercial Paper, Agency Paper, CD, finance company MTNs and, of course, other money markets, and you decide to take your money out, well - sorry, you are out of luck. It's the law.

A brief primer on money markets

A very succinct explanation of what money markets are was provided by none other than SEC's Luis Aguilar on June 24, 2009, when he was presenting the case for making even the possibility of money market runs a thing of the past. To wit:

 

Money market funds were founded nearly 40 years ago. And, as is well known, one of the hallmarks of money market funds is their ability to maintain a stable net asset value — typically at a dollar per share. In the time they have been around, money market funds have grown enormously — from $180 billion in 1983 (when Rule 2a-7 was first adopted), to $1.4 trillion at the end of 1998, to approximately $3.8 trillion at the end of 2008, just ten years later. The Release in front of us sets forth a number of informative statistics but a few that are of particular interest are the following: today, money market funds account for approximately 39% of all investment company assets; about 80% of all U.S. companies use money market funds in managing their cash balances; and about 20% of the cash balances of all U.S. households are held in money market funds. Clearly, money market funds have become part of the fabric by which families, and companies manage their
financial affairs.

When the Reserve fund broke the buck, and it seemed like an all-out rout of money markets was inevitable, the result would have been a virtual elimination of capital access by everyone: from households to companies. This reverberated for months, as the also presumably extremely safe Commercial Paper market was the next to freeze up, side by side with all traditional forms of credit. Only after the Fed stepped in an guaranteed money markets, and turned on the liquidity stabilization first, then quantitative easing spigot second, did things go back to some sort of new normal. However, it is only a matter of time before the patchwork of band aids holding the dam together is once again exposed, and a new, stronger and, well, "improved" run on the electronic bank materializes. It is precisely this contingency that the SEC and the administration are preparing for by "empowering money market fund boards of directors to suspend redemptions in extraordinary circumstances to protect the interests of fund shareholders."

A little more on money markets:

Money market funds seek to limit exposure to losses due to credit, market, and liquidity risks. Money market funds, in the United States, are regulated by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940. Rule 2a-7 of the act restricts investments in money market funds by quality, maturity and diversity. Under this act, a money fund mainly buys the highest rated debt, which matures in under 13 months. The portfolio must maintain a weighted average maturity (WAM) of 90 days or less and not invest more than 5% in any one issuer, except for government securities and repurchase agreements.

Ironically, the proposed change to Rule 2a-7 seeks to make dramatic changes to the composition of MMs: from 90 days, the WAM would get shortened to 60 days. And this is occurring at a time when the government is desperately seeking to find ways of extending maturities and durations of short-term debt instruments: by reverse rolling the $3.2 trillion industry, the impetus will be precisely the reverse of what should be happening, as more ultra-short maturity instruments are horded up, leaving a dead zone in the 60-90 day maturity window. Some other proposed changes to 2a-7 include "prohibiting the funds from investing in Second Tier securities, as defined in Rule 2a-7. Eligible securities would be redefined as securities receiving only the highest, rather than the highest two, short-term debt ratings from a requisite nationally recognized securities rating  organization. Further, money market funds would be permitted to acquire long-term unrated securities only if they have received long-term ratings in the highest two, rather than the highest three, ratings categories." In other words, let's make them so safe, that when the time comes, nobody will have access to them. Brilliant.

The utility of money market funds has long been questioned by such systemically-embedded financial luminaries as Paul Volcker (more on this in a minute). After all, what are money markets if merely an easy, and 401(k)-eligible option to not invest in equity or bonds, but in "paper" which is cash in all but name (maybe not so much after the proposed Rule change passes). And as money markets account for a huge portion of the $11 trillion of mutual fund assets as of November (per ICI, whose opinion, incidentally, was instrumental in shaping future money market policy), $3.3 trillion to be precise, and second only to stock funds at $4.8 trillion, one can see why an administration, hell bent on recreating a stock-price bubble, would do all it can to make money markets extremely unattractive. In fact, the current administration has been on a roll on this regard: i) keeping money market rates at record lows, ii) removing money market fund guarantees and iii) and even allowing reverse repos to use money markets as sources of liquidity (because we all know that the collateral behind the banks shadow banking arrangement with the Fed are literally crap; as we have noted before, we will continue claiming this until the Fed disproves us by opening up their books for full inspection. Until then, yes, the Fed has lent out hundreds of billions against bankrupt company equity, as we have pointed out in the past).  Money Markets are the easiest recourse that idiotic class of Americans known as "savers" has to give the big bank oligarchs, the Fed and the bubble-inflating Administration the middle finger. As you will recall, recently Arianna Huffington has been soliciting all Americans do just that: to move their money out of the tentacles of the TBTFs. In essence, the money market optionality is precisely the equivalent of moving physical money from TBTFs to community banks in the "shadow economy." Because where there is $3.3 trillion out of $11, there could easily be $11 trillion out of $11, which would destroy the whole concept of Fed-spearheaded asset-price inflation, and would destroy overnight the TBTFs, as equities would once again find their fair value. It is no surprise then, that the current financial system, and its political cronies loathe the concept of Money Markets, and have done all they could to make them as unattractive as possible. Below is a chart of the Net Assets held by all US money market funds and the number of money market mutual funds since January 2008:

Obviously, attempts to push capital out of MMs have succeeded: after peaking at $3.9 trillion, currently money markets hold a two year low of $3.27 trillion. Furthermore, the number of actual money market fund operations has been substantially hit: from 2,078 in the days after the Lehman implosion, this is now down to 1,828, a 12% reduction. At this rate soon there won't be all that many money market funds to chose from. While the AUM reduction is explicable through the previously mentioned three factors, the actual reduction in number of funds is on the surface not quite a straightforward, and will likely be the topic a future Zero Hedge post. Although, the impetus of managing money when one can return at most 0.6% annually, and charge fees on this "return" may be missing - the answer may be far simpler than we think. Why run a money market, when the Fed will be happy to issue you a bank charter, and you can collect much more, risk free, courtesy of the vertical yield curve.

Yet what is strange is that even with all the adverse consequences of holding cash in Money Markets, the total AUM of this "safest" investment option is still substantial, at nearly $3.3 trillion as of December 30, a big decline yes, but a decline that should have been much greater considering even the president since March 3 has been beckoning his daily viewership to invest in cheap stocks courtesy of low "profit and earning ratios" (that, and the specter of President's Working Group on Financial Markets). Could this action, whereby investors will no longer have access to money that historically has been sacrosanct and reachable and disposable on a moment's notice, be the last nail in the coffin of money markets? We believe so, however, we are not sure if it will attain the desired effect. With an aging baby boomer population, which would rather burn their money than invest in the stock market again and relive the roller-coaster days of late 2008 and early 2009, the plan may well backfire, and result in even more money leaving the shadow system and entering such tangible objects as deposit accounts (at community banks, of course), mattresses and socks. And speaking of the President's Working Group...

The Group of Thirty

When discussing the shadow economy, it is only fitting to discuss the shadow decision-makers. In this regard, the Group of 30, is to the traditional economic decision-making process as the President's Working Group is to capital markets. Taken from the website, the self-description reads innocently enough:

The Group of Thirty, established in 1978, is a private, nonprofit, international body composed of very senior representatives of the private and public sectors and academia. It aims to deepen understanding of international economic and financial issues, to explore the international repercussions of decisions taken in the public and private sectors, and to examine the choices available to market practitioners and policymakers. The Group's members meet in plenary sessions twice a year with select guests to discuss important economic, financial and policy developments. They reach out to a wider audience in seminars and symposia.  Of most importance to our membership and supporters is the annual International Banking Seminar.

Sounds like any old D.C.-based think tank... until one looks at the roster of members:

  • Paul A. Volcker, Chairman of the Board of Trustees, Group of Thirty, Former Chairman, Board of Governors of the Federal Reserve System
  • Jacob A. Frenkel, Chairman, Group of Thirty, Vice Chairman, American International Group, Former Governor, Bank of Israel
  • Jean-Claude Trichet, President, European Central Bank, Former Governor, Banque de France
  • Zhou Xiaochuan, Governor, People’s Bank of China, Former President, China Construction Bank, Former Asst. Minister of Foreign Trade
  • Yutaka Yamaguchi, Former Deputy Governor, Bank of Japan, Former Chairman, Euro Currency Standing Commission
  • William McDonough, Vice Chairman and Special Advisor to the Chairman, Merrill Lynch, Former Chairman, Public Company Accounting Oversight Board, Former President, Federal Reserve Bank of New York
  • Richard A. Debs, Advisory Director, Morgan Stanley, Former President, Morgan Stanley International, Former COO, Federal Reserve Bank of New York
  • Abdulatif Al-Hamad, Chairman, Arab Fund for Economic and Social Development, Former Minister of Finance and Minister of Planning, Kuwait
  • William R. Rhodes, Senior Vice Chairman, Citigroup, Chairman, President and CEO, Citicorp and Citibank
  • Ernest Stern, Partner and Senior Advisor, The Rohatyn Group, Former Managing Director, JPMorgan Chase, Former Managing Director, World Bank
  • Jaime Caruana, Financial Counsellor, International Monetary Fund, Former Governor, Banco de España, Former Chairman, Basel Committee on Banking Supervision
  • E. Gerald Corrigan, Managing Director, Goldman Sachs Group, Inc., Former President, Federal Reserve Bank of New York
  • Andrew D. Crockett, President, JPMorgan Chase International, Former General Manager, Bank for International Settlements
  • Guillermo de la Dehesa Romero, Director and Member of the Executive Committee, Grupo Santander, Former Deputy Managing Director, Banco de España, Former Secretary of State, Ministry of Economy and Finance, Spain
  • Mario Draghi, Governor, Banca d’Italia, Chairman, Financial Stability Forum, Member of the Governing and General Councils, European Central Bank, Former Vice Chairman and Managing Director, Goldman Sachs International
  • Martin Feldstein, Professor of Economics, Harvard University, President Emeritus, National Bureau of Economic Research, Former Chairman, Council of Economic Advisers
  • Roger W. Ferguson, Jr., Chief Executive, TIAA-CREF, Former Chairman, Swiss Re America Holding Corporation, Former Vice Chairman, Board of Governors of the Federal Reserve System
  • Stanley Fischer, Governor, Bank of Israel, Former First Managing Director, International Monetary Fund
  • Philipp Hildebrand, Vice Chairman of the Governing Board, Swiss National Bank, Former Partner, Moore Capital Management
  • Paul Krugman, Professor of Economics, Woodrow Wilson School, Princeton University, Former Member, Council of Economic Advisors
  • Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and Economics, Harvard University, Former Chief Economist and Director of Research, IMF

and, of course:

  • Timothy F. Geithner, President and Chief Executive Officer, Federal Reserve Bank of New York, Former U.S. Undersecretary of Treasury for International Affairs
  • Lawrence Summers, Charles W. Eliot University Professor, Harvard University, Former President, Harvard University, Former U.S. Secretary of the Treasury

and many more. Given the choice of being a fly on the wall at a G7 meeting or that of the "Group of 30", we would be very curious to see who would pick the former over the latter. These are the people, whose "reports" and groupthink determines the financial fate of the world: their vested interest in perpetuating the status quo is second to none. Which is why we read with great interest a recent paper from the Group of 30: Financial Reform, A Framework for Financial Stability, released on January 15, 2009, deep in the heart of the crisis. While the paper has enough insight for many, non-related posts (we are already working on several), we will focus on the policy recommendations presented for money market funds.

Money Market Mutual Funds and Supervision


Recommendation 3:

 

a. Money market mutual funds wishing to continue to offer bank-like services, such as transaction account services, withdrawals on demand at par, and assurances of maintaining a stable net asset value (NAV) at par should be required to reorganize as special-purpose banks, with appropriate prudential regulation and supervision, government insurance, and access to central bank lender-of-last-resort facilities.

 

b. Those institutions remaining as money market mutual funds should only offer a conservative investment option with modest upside potential at relatively low risk. The vehicles should be clearly differentiated from federally insured instruments offered by banks, such as money market deposit funds, with no explicit or implicit assurances to investors that funds can be withdrawn on demand at a stable NAV. Money market mutual funds should not be permitted to use amortized cost pricing, with the implication that they carry a fluctuating NAV rather than one that is pegged at US$1.00 per share.

The phrasing of "with no explicit or implicit assurances to investors that funds can be withdrawn on demand at a stable NAV" should be sufficient to whiten the hairs of every proponent of money markets as a "safe" investment alternative. Yet what the SEC has done, is to take the Group of 30 recommendation, and take it to the next level: not only will funds not have explicit assurance of any kind vis-a-vis funding, but in fact, the redemption of said funds would be legally barred upon "extraordinary circumstances."

Rule 22e-3

From the SEC:

Proposed rule 22e–3(a) would permit a money market fund to suspend redemptions if: (i) The fund’s current price per share, calculated pursuant to rule 2a–7(c), is less than the fund’s stable net asset value per share; (ii) its board of directors, including a majority of directors who are not interested  persons, approves the liquidation of the fund; and (iii) the fund, prior to suspending redemptions, notifies the Commission of its decision to liquidate and suspend redemptions, by electronic mail directed to the attention of our Director of the Division of Investment Management or the Director’s designee. These proposed conditions are intended to ensure that any suspension of redemptions will be consistent with the underlying policies of section 22(e). We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares. Accordingly, our proposal is limited to permitting suspension of this statutory protection only in extraordinary circumstances. Thus, the proposed conditions, which are similar to those of the temporary rule, are designed to limit the availability of the rule to circumstances that present a significant risk of a run on the fund. Moreover, the exemption would require action of the fund board (including the independent directors), which would be acting in its capacity as a fiduciary. The proposed rule contains an additional provision that would permit us to take steps to protect investors. Specifically, the proposed rule would permit us to rescind or modify the relief provided by the rule (and thus require the fund to resume honoring redemptions) if, for example, a liquidating fund has not devised, or is not properly executing, a plan of liquidation that protects fund shareholders. Under this provision, the Commission may modify the relief ‘‘after appropriate notice and opportunity for hearing,’’ in accordance with section 40 of the Act.

Lots of keywords there: "fiduciary", "impose hardships" but most notably "permit us to take steps to protect investors." Uh, SEC, no thanks. We can protect ourselves. Your protection so far has resulted in the Madoff scandal, the BofA fiasco, billions in insider trading profits and not one guilty person, who did not manage to escape unscathed with merely a wrist slap in the form of some pathetic fine. With all due respect, SEC, any proposal that involves you acting to "protect" us should be immediately banned and any further discussion ended.

Especially in this case: what the SEC is proposing is simple - the entire market structure has been converted to a hedge fund. When investors hear the word "suspend redemptions" they envisioned a battered, pro-cyclical, leveraged, permabullish hedge fund, that suddenly "found itself" down 30, 40, 50 or more percent, and to avoid instantaneous liquidation, had to bar redemptions. Forgive us, but is the SEC confirming that the entire market is now one big casino, one big government subsidized hedge fund, where as long as things go up, all is good, but the second things take a leg down, just like any ponzi, nobody will be allowed to pull their money? Maybe Madoff should have created the same redemption suspension: his fund would still be alive and thriving, now that the government has become the biggest ponzi conductor of all time. And nobody would have been the wiser. But instead, the Securities and Exchange Commission, in discussions with the Group of 30, Barney Frank, and any other conflicted individuals who only care about protecting their own money for one more year, has decided, in its infinite wisdom, to make money markets a complete scam. And this is the gist of regulatory reform in America.

Conclusion

At this point it is without doubt that even the government understands that when things turn sour, and they will, the run on the bank will be unavoidable: their solution - prevent money from being dispensed, when that moment comes. The thing about crises, be they liquidity, solvency, or plain-vanilla, is that "price discovery" occurs all at once, and at the very same time. And all too often, investors "discover" they were lied to, as the emperor, in any fiat system, always has no clothes. Just like in September 2008, when the banks were forced to look at each-others' balance sheet and realize that there are no real assets on the left backing up the liabilities on the right, so the moment of enlightenment occurs are the most importune time: just ask Hank Paulson. Had he known his action of beefing up Goldman's FICC trading axes would have resulted in the "Ice-Nine'ing" (to borrow a Mark Pittman term) of money markets, who knows- maybe Lehman would have still been alive. Perhaps risking the cash access of 20% of US households and 80% of companies was not worth the few extra zeroes in Goldman's EPS. But we will never know. What we will know, is that now i) the government is all too aware that the market has become one huge ponzi, and that all investment vehicles, even the safest ones, are subject to bank runs, and ii) that said bank runs, will occur. It is only a matter of time. And just as the president told everyone directly to buy the market on March 3, so the SEC, the Group of 30, and Barney Frank are telling us all, much less directly, to get the hell out of Dodge. Alternatively, the game of "last fool in", holding the burning hot potato, can continue indefinitely, until such time as the marginal utility of each and every dollar printed by Ben Bernanke is zero.

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Thu, 07/19/2012 - 19:09 | 2634120 Larry Dallas
Larry Dallas's picture

Hide yo wife, hide yo daughters, hide your PMs.

Thu, 07/19/2012 - 19:13 | 2634129 slaughterer
slaughterer's picture

Momo darling CMG tumbling in AH.  Why no snarky ZH Schadenfreude?

Thu, 07/19/2012 - 19:17 | 2634137 FEDbuster
FEDbuster's picture

One more time for those whom haven't seen this:

Ninety Miles An Hour Down a Dead End Street Posted by Ann Barnhardt - July 12, AD 2012 11:39 AM MST

 

People are emailing asking what firm I recommend.

NONE.

GET OUT.
GET OUT.
GET OUT.
GET OUT.
GET OUT.
GET OUT.
GET OUT.
GET OUT.
GET OUT.

The ENTIRE SYSTEM is totally, completely corrupt and therefore NO FIRM IS SAFE. Don't be stupid. Don't be obtuse. Snap yourself out of the Stockholm Syndrome that you are clearly stuck in. Get ALL MONEY out of the ENTIRE FINANCIAL SYSTEM, including stocks, bonds, retirement accounts, futures, EVERYTHING.

But what about . . .

What part of EVERYTHING are you not comprehending?

One. More. Time.

If you can't touch it, if it isn't physically on your property such that you can stand in front of it with an assault rifle and PHYSICALLY defend it, you don't own it, and it could be confiscated/stolen from you at any time, if it ever actually existed at all.

Thu, 07/19/2012 - 19:18 | 2634148 Surly Bear
Surly Bear's picture

You didn't do anything to create your wealth. Somebody else did that!

Thu, 07/19/2012 - 19:21 | 2634160 SilverTree
SilverTree's picture

Timewave zero Bitchez!

Thu, 07/19/2012 - 19:30 | 2634185 I think I need ...
I think I need to buy a gun's picture

if your going to panic its good to panic early bitchez

 

Thu, 07/19/2012 - 19:43 | 2634237 francis_sawyer
francis_sawyer's picture

 "What does the Fed know about market liquidity conditions that it does not want to share, and more importantly, is the Fed seeing a rapid deterioration in liquidity conditions in the future, that may and/or will prompt retail investors to pull their money in another Lehman-like bank run repeat?"

~~~

Gee whiz... I think everyone on ZH has thought about this every single fucking dayt for about the last 3-4 years now, so it only stands to reason that THE FED might be starting, just starting mind you, to think about this now...

Remember... "Subprime is contained"...

Thu, 07/19/2012 - 20:24 | 2634357 Chief KnocAHoma
Chief KnocAHoma's picture

1 - Ann Barnhardt is sexy!

2 - Is there any way we could hold these elections in August?

Thu, 07/19/2012 - 21:16 | 2634491 AlaricBalth
AlaricBalth's picture

One of the best, most comprehensive pieces I have read on ZeroHedge.

Thank you!!

Thu, 07/19/2012 - 21:30 | 2634528 DoChenRollingBearing
DoChenRollingBearing's picture

Great piece, great comment.

+ 1

I yanked $500 more from the ATM on my drive home.

Run, Bitchez!

Thu, 07/19/2012 - 21:30 | 2634531 markmotive
markmotive's picture

First they force you to hold currency. Then they destroy the currency.

Gold $8000

http://www.planbeconomics.com/2012/07/19/james-turk-says-gold-heading-to-8000oz/

Thu, 07/19/2012 - 21:36 | 2634551 i-dog
i-dog's picture

"is the Fed seeing a rapid deterioration in liquidity conditions in the future"

Yes. Very soon. They are the ones who will engineer it.

Next question?

Thu, 07/19/2012 - 21:57 | 2634578 Harlequin001
Harlequin001's picture

'A key feature of the proposal is that large redemptions would subordinate a portion of an investor’s MBR, creating a disincentive to redeem if the fund is likely to have losses.' so not unlike the 'market value adjusters' that applied to 'with profits 'funds that crippled thousands of investors.

'...if the fund is likely to have losses.' - what are they saying here, that MMF's are not fairly valued on a mark to market basis, and that they can incur hidden losses?

'In particular, we suggest a rule that would subordinate a portion of a redeeming shareholders’ MBR, so that the redeemer’s MBR absorbs losses before those of non?redeemers.' Hey I've got a really cool and innovative idea, why don't we just value the fucking thing properly so that the price is always accurate and those who stay, just like those who redeem know exactly how much their investment is worth? Is that not mind blowingly novel? And it gets better, because those new investors won't be paying the inflated share price in which the losses are hidden in the first place. They will be buying it for it's fair price, that is if they're totally stupid. But if there's one thing worse than being totally stupid, it's being skint and totally stupid.

This is nothing more than a central bank conspiring to allow fund managers to deliberately mislead investors so that it can retain investors funds. Not only are they now condoning lying to the public but are also now conspiring to prevent you from taking your money out.

Why don't you just buy gold and be done with it and then simply wait for these MMF investors to come your way, and thereby blowing the price of your gold through the stratosphere?

Thu, 07/19/2012 - 22:23 | 2634665 derek_vineyard
derek_vineyard's picture

real fear hit in 2008 when money markets and cash beyond fdic limits were threatened........money market yields went to 8% as all commercial paper was deemed junk  (treasury money markets were closed to new investors by many brokerages including vanguard and are still closed today and there was nowhere to hide)

that was just a prelude......what if the Fed allowed more than 1 money market to break the buck?    a bank run!!!!!!!!!!!!

Thu, 07/19/2012 - 22:41 | 2634705 WillyGroper
WillyGroper's picture

I know 2 people that got stuck in the Reserve Primary Fund for a while. Not nice.

Fri, 07/20/2012 - 01:12 | 2634920 Harlequin001
Harlequin001's picture

The thing is any ordinary fund manager can go to jail for precisely what these guys are contemplating, incorrectly valueing funds.

But isn't that what Lieborgate is all about?

and these people are making excuses for it because it's in our 'best interests' to keep the system going. You must be joking.

If ever there was a need to get your money out of the US and into gold offshore, this is it. It's one thing to take the piss out of Goldman's clients for being muppets but if you don't see this one coming then you really are the biggest muppet of them all...

Fri, 07/20/2012 - 04:08 | 2635045 AldousHuxley
AldousHuxley's picture

Get OUT?

 

You can't escape the collective greed spreading US dollars all over the world.

 

They tax the shit out of you, so that you put your savings into tax-exempt accounts which basically puts money back in control of the government.

 

Ghadaffi had tons of gold, but US military went after him, and no hedge fund manager will hold more than 25% of personal assets in gold for fear of missing out.

Largest gold owner is the Fed, so they can manipulate.

You can't beat the system when you play by their rules.

 

Gold won't make you free when you are controlled by greed. Greed is what wall st. exploits to have you trade your time for Money.

 

They don't fine you when you commit a crime. They put you in jail to rob you of your time. They PAY you to be housed in jail $50k/year to rob you of your time.

 

Value your time......richest of the rich values time more than money. You can't buy time.

They tried to buy a new mother time away from her child by offering $100,000,000.....she is CEO of Yahoo at age 37. 

 

Fri, 07/20/2012 - 04:30 | 2635052 HardAssets
HardAssets's picture

Thing I hate most about

the bankster fuckers -

they steal our precious

limited time on this earth

with those we love.

We waste time struggling

against them.

Also hate that retired family

should be enjoying their last

years, not worrying about getting

by while their life's nestegg melts away,

victim of ZIRP for banksters.

Fri, 07/20/2012 - 18:52 | 2637942 soccerballtux
soccerballtux's picture

do not store up for yourself treasure on earth, where moth and rust destroy, where thieves break in and steal, where governments tax, and banksters inflate

Fri, 07/20/2012 - 01:18 | 2634923 derek_vineyard
derek_vineyard's picture

yoelding .12 or so for prime money market , no wonder treasury yields can go negative

Fri, 07/20/2012 - 08:09 | 2635281 bernorange
bernorange's picture

"This is nothing more than a central bank conspiring to allow fund managers to deliberately mislead investors so that it can retain investors funds."

Sounds like LIBOR all over again.

Thu, 07/19/2012 - 23:00 | 2634717 Goldilocks
Goldilocks's picture

Next question?        ...   what is liquidity?

~//~

li•quid•i•ty

In finance, a company's liquidity is the amount of cash or liquid assets it has easily available.

...so is liquidity a type of faith based fiction?

Thu, 07/19/2012 - 23:55 | 2634832 Oh regional Indian
Oh regional Indian's picture

Actually, it's a reality based sludge. 

No-Flotm (Liquidity You Cannot Haz!)

ori

war-inc

Fri, 07/20/2012 - 03:29 | 2635005 HardAssets
HardAssets's picture

A bigger question is - what is 'cash' ?  As I read through their proposal it all strikes me as complete b.s. . . . the trillions of 'dollars' ?  WTF is a 'dollar' today anyway ?   I'm getting more PMs.  Others can do what they want,  good luck to them.

Thu, 07/19/2012 - 23:38 | 2634798 Element
Element's picture

But ... bu ... I really don't get this ... everything was ok on Tuesday.

/muppet

Thu, 07/19/2012 - 21:44 | 2634563 engineertheeconomy
engineertheeconomy's picture

The time has come.

The guys at the very top of the heap have started eating eachothers faces off.

It's time to buy some big Gold bricks and bury them.

Thu, 07/19/2012 - 20:49 | 2634416 Unbezahlbar
Unbezahlbar's picture

good links. btw, during an interview the other day, John Williams over at Shadow Stats said silver may climb to $200 in time. Sorry I don't have the link anymore....he is always super informative.

Thu, 07/19/2012 - 21:12 | 2634481 HungrySeagull
HungrySeagull's picture

200?

Hell call it 20 - 1 ration and make it... 80. 12 to 1 = $133.

Maybe a bit more if the Gold Price waffles around 1600.

Thu, 07/19/2012 - 20:16 | 2634342 resurger
resurger's picture

the lemmings are still goaded to the abbatoir as long as they make money they dont give any flying fucks!

Well 2008 was real estate bubble, now we have 2 bubbles , Bonds bubble and equity bubble.

The bonds and equity will cave in in one fine morning, you will wake up and you will see the brickwall infront of you .. that's the moment of truth.

“The illusion of freedom will continue as long as it's profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater.”

FZ

Thu, 07/19/2012 - 23:30 | 2634781 Larry Dallas
Larry Dallas's picture

resurger:

This generation still remembers all too well the dot.com bust of 2001. So that makes 3 bubbles. That evaporation lead to folks levering up to lose it all - and more - in 2008.

Larry

(Chiming in from the Regal Beagle)

Thu, 07/19/2012 - 21:48 | 2634574 disabledvet
disabledvet's picture

Good point...absolutely valid as well. Hasn't the bank run already occurred tho? Obviously "we can't see it" because the Fed has (literally) "papered it over." But just as obviously...and as I have said (famously in my view...of course) "the Fed is not a publicly traded corporation." in other words and I guess all I have ever said is "it worked. They got away with it." in other words interest rates AT THE FEDERAL LEVEL...did not, nor have they since...explode higher. Of course "past performance is not a predictor of future results." is your past performance however...because I have no fear of including mine.

Thu, 07/19/2012 - 19:57 | 2634294 Ineverslice
Ineverslice's picture

Banks still open for 4 more hrs. here on HST. Maybe another large withdrawl in tens and twenties to piss off the clueless tellers that keep me waiting in line.

Thu, 07/19/2012 - 20:50 | 2634422 max2205
max2205's picture

And poof.... 3 trillion, gone!

Fri, 07/20/2012 - 04:35 | 2635053 HardAssets
HardAssets's picture

3 trillion what gone ?  Illusions that people obey ?

How come we never hear about Iceland ?  Their eyes opened to the illusion, and they

told the criiminals to go bugger off (or the Icelandic equivalent phrase)

Fri, 07/20/2012 - 11:12 | 2636199 AGuy
AGuy's picture

No Worries! This is just part of a Surprise Holiday for Bankers:

A Banking Holiday!

After all, all those hard working bankers stealing money of the middle class deserve a some time off. Maybe a week, month, couple of years..

Perhaps Corzine was a prodigy. Since his plan worked, other will surely follow. Why not go on stealing more money? A. He didn't go to jail, B. the American people didn't revolt. Americans were too busy watching American Idol (or is American Idiot) and  Dancing with the stars. They don't care if they are fleeced! Ready - Set GO! Let the fleecing begin!

 

Thu, 07/19/2012 - 20:32 | 2634382 Poor Grogman
Poor Grogman's picture

Is nothing too sacred for the "Group of 30 Bozo's" to fuck over.

This will backfire just like everything they touch,.

Once again they ignore the "Human action" dimension of their so called planning.

No wonder the system is dying on the vine if this is the best deal that 3.5 Trillion can find these days.

It must be sobering for those in the "Group of 30" to stare reality in the face and realise that it is all coming apart on their watch.

Thu, 07/19/2012 - 22:34 | 2634696 AlaricBalth
AlaricBalth's picture

Sobering? This Group of 30 is so drunk from their own arrogance and insatiable desire for more and more power that they actually subscribe to the utter nonsense that they try to foist upon the masses.

Fri, 07/20/2012 - 06:44 | 2635152 merizobeach
merizobeach's picture

I wasn't surprised at all to see Volcker, Trichet, Draghi, Dudley, Fischer, and Summers, but I was actually a little surprised to see Krugman; I guess I just thought that everybody found him to be insufferable.

Fri, 07/20/2012 - 10:20 | 2635951 Jethro
Jethro's picture

I'm sure we can collectively find another 22 so that a good deck of cards can be made (like in the Iraq war).

 

Fri, 07/20/2012 - 04:38 | 2635056 HardAssets
HardAssets's picture

Theyre brining it down, my friend. Its not an accident. Sounds 'outrageous', I know.  Do some research; they want their New World Order. Crazy bastards.

Fri, 07/20/2012 - 08:57 | 2635473 northerngirl
northerngirl's picture

They have already brought it down, the general public is just not seeing it, nor felt the real pain yet.

Thu, 07/19/2012 - 21:35 | 2634548 ZeroAvatar
ZeroAvatar's picture

"You have to create your wealth, to see how somebody else did it".

Thu, 07/19/2012 - 23:35 | 2634790 Dr. Richard Head
Dr. Richard Head's picture

Our 401k manager came into to talk to our chairman. He presented a profit share program using stocks as a vehicle. Here is my rough draft to the chairman. Snake oil salesmen.

The profit sharing program Bixel presented seems to be nothing more than to share the profits of our company's labor with Bixel's money management firm, as well sharing our company's profit with Wall Street stocks. 

I believe you would have greater impact with the employees with cash, as cash is king - for now. 

Between redemption request restrictions mandated by government and stock redemption restrictions, not to mention withdrawal penalties and market fluctuations, the money is hindered by the hands that hold it. Dont forget tax implications on capital gains and the arbitrary holding periods fiddled with in congress, as well as taxable rates Smoke and mirrors for the sake of a corporate tax breaks perhaps, but I don't know the motivating factor in the profit sharing consideration other than Bixel wanting to talk to you about it. 

To be so concerned by health insurance premium increases under Obama and then to throw the profits to employees in the form of market fluctuations tied to digital representations of fractional shares of another company's profits seems counterintuitive to me. 

Perhaps there is a piece of the puzzle I am missing, but based on our employee base and the above mentioned observations, I really think you would get more monetary motivation on increased bonuses to the employees then to had it over to a ponzi of habitual gamblers liars and thieves. If you need proof of the thievery I have a clear annotated list of prosecuted examples in my possession for your review. 

Just my thoughts. As a non-voting board member, I wanted to share. 

Sent from my iPhone

Fri, 07/20/2012 - 04:45 | 2635059 HardAssets
HardAssets's picture

Good phone text. And you didnt even use cuss words. That must have been tough.

Fri, 07/20/2012 - 07:39 | 2635204 Hobie
Hobie's picture

I imagine he uttered your name upon receiving that message. Well done Richard!

Thu, 07/19/2012 - 22:11 | 2634637 JoBob
JoBob's picture

If you're going to panic...

Fri, 07/20/2012 - 01:04 | 2634910 Element
Element's picture

Create the problem, present the solution.

Version 2.0

Thu, 07/19/2012 - 19:58 | 2634297 nmewn
nmewn's picture

"You didn't do anything to create your wealth. Somebody else did that!"

THE glimpse into the inner workings of minds of statists everywhere, no matter their stripes. He's just the only one arrogant enough to come out and say it...with the audacity of a dope.

You see, you took on no risk at all to your savings or credit because there was a street in front of your business. Never mind there are streets in Moscow too. And vacant shopping centers and business parks everywhere here. You don't pay taxes yourself for that street to be there because you don't use it somehow, you teleport to your business by PFM, somebody else pays those taxes.

This has got to be the stupidest thing he's ever said...and thats saying something in itself...what does he say for an encore?

Thu, 07/19/2012 - 20:11 | 2634334 pain_and_soros
pain_and_soros's picture

The fact that his playing to his audience (the entitlement crowd) got loud applause in support of these statements should tell you that he is merely preparing for the gutting of whatever is left of the declining number of middle class and giving what they have to the "poor", thereby wiping out any hope for escape from a fascist state, while the 1% take TOTAL CONTROL of EVERYTHING...

 

 

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