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Ponzi Regulatory Reform


JANUARY 12, 2010


Below are some excerpts from a recent article by Tyler Durden of the financial blog ZeroHedge. This particular piece uncovers some of the latest discussions of regulatory reform in America.

According to this article the Security and Exchange Commission (SEC), along with the Group of 30, (Paul Volker - Tim Geithner - Larry Summers - executives from Goldman Sachs/JP Morgan - foreign central bank representatives - and Barney Frank) have been raising some interesting recommendations regarding Money Market Funds along with proposed changes in their legal supervision.

First let's define a Money Market Fund according to the SEC's website:

A money market fund is a type of mutual fund that is required by law to invest in low-risk securities. These funds have relatively low risks compared to other mutual funds and pay dividends that generally reflect short-term interest rates.

Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, or other highly liquid and low-risk securities.

Excerpts from ZeroHedge 1/3/2010

...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... 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 Group of 30

ZeroHedge 1/3/2010 continued...

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


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