At a May 10th SEC roundtable discussion on Dodd-Frank rulemaking, money market mutual funds voiced strong opposition to the new, bank-like regulatory structure to which they may soon be subjected. One roundtable participant, the Investment Company Institute, floated the idea of a special liquidity bank as a solution to emergency funding needs. Such a facility would be housed in the Fed, have direct access to the Fed’s discount window and be structured as a commercial bank holding government and agency securities with short maturities.
In response to the special facility proposal, FDIC Chairman Sheila Bair said that it amounted to nothing more than “institutionalizing a bailout facility” for the funds. Additionally, Bair repeated the need to move to a floating net asset value (NAV) which would reflect changes in market risk. Roundtable participants were skeptical of the floating NAV saying that the funds depend on a stable NAV because it assures a safe principal. Bair’s use of the “scarlet B” in characterizing ICI’s proposal can only be seen as a concerted effort to stigmatize the proposal out of existence before it can be considered further since there is little appetite for bailouts in Washington, D.C.