Fed Shenanigans Exposed: What You Can Do About Your Money Market Account Being Frozen

Will your legal right to redeem your money market account be denied? (Leland National Gold Exchange)

A hidden evil has crawled its way into what many of you may have believed to be a 'safe' way to stash some of your hard-earned money. And the motive? $2.7 trillion in U.S. money market funds. The perpetrator: a proposal to change the primary assumptions of the key Money Market Rule 2a-7. This proposal would give money market fund managers the option to "suspend redemptions to allow for the orderly liquidation of fund assets."

The espoused purpose is to prevent money market runs (the same thing that crushed Lehman when the Reserve Fund broke the buck). The last time this 'protection' plan was put on the table, it was rejected expediently, but now the New York Fed has 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". It would do you well to note that past attempts to prevent bank runs not only failed, but usually accelerated accomplishing just that (Reference: see Europe). So why is this happening now? Well here is the Fed's excuse 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."

So the stated purpose for an MBR is basically to lessen the benefits of redeeming MMF shares quickly when a fund is in trouble and to reduce the potential costs that others’ redemptions impose on redeeming shareholders. In other words, the MBR servers as an effective deterrent to runs by ensuring a fairer allocation of losses among investors.

The abstract continues, "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."

In sum, the Fed is basically saying that a 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 only price is a "small fraction" of each fund investor's recent balances to be sequestered off into a sinking fund in order to absorb losses if the fund is liquidated. The proposal 'suggests' a 5% fraction but only as an example. No, I strongly believe that the real issue here is capital controls. Once this proposal gets implemented, the Fed, or some other incompetent and uncaring regulator, will have full control over how much money market cash is 'withdrawable' from the system at any given moment. With $2.7 trillion in total at stake, one can see why the Fed is suddenly 'concerned' about this critical liquidity and capital buffer.

The problem lies in the repetitive creature-of-habit we call history. Any authoritarian attempt to preserve a liquidity buffer is doomed to fail because MMF participants can always quietly pull their money out at the convenience when they can and not when they have to.

It's really quite interesting that money market funds are a target now. I mean come on, they've always been one of the most hated liquidity intermediaries by the central planners since they don't go into stocks nor bonds. They just sit there collecting no interest, and more importantly, can't be 're-allocated' by anyone nor any Fed anywhere.

So where can one put one's funds if one doesn't want them to be frozen at someone else's whim? Precious metals my friends. Precious metals. Of course, the main hurdle there is going to be how you can avoid extremely high sales commissions and that's why I personally recommend using Leland National Gold Exchange. With gold prices showing a high probability of not only reaching a bottom platform, but also what appears to be preparation for another bullish launch, maybe it's time you get some of your assets moved to something a little less prone to Fed shenanigan interventions.

What are you waiting for? Get moving!

Over and Out,

- Peter

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