Newest Fed Reserve Bank President Backs Sanders' Bank Breakup Plan

The headline in the 'Money & Investing' section of Wednesday's  Wall Street Journal was 'Fed Official Backs Bank Breakups' (p. C1) which must have given all the investor class and banksters new heart palpitations that if Bernie is elected they have much to fear - and they will.   ( See e.g. Wall Street Journal  'Populists Reject Economic Orthodoxy' where author Greg Ip alerts us to the trepidation now felt by investors,  terrified because well, Bernie Sanders appears quite serious in his determination to break up the big banks.)

As the earlier cited WSJ piece notes (and let's please bear in mind the Journal is no "radical" publication):

"The Federal Reserve's newest bank president, a Republican who served as a top Treasury Department official during the financial crisis, called Tuesday for policy makers to consider breaking up big banks to prevent future government bailouts."

This is especially a crucial issue to those of us invested in money market funds as opposed to the volatile stock market. Many may not recall that in the wake of the 2007-08 disaster Bernanke's Fed was actually considering limiting any protection of money market funds, monies. . In 2010, the SEC actually started to run with the idea of allowing money markets to "float" as opposed to having a fixed $1 net asset value (NAV).

In The Financial Times of January 28, 2010 ('Markets & Investing' section, page 23) - about a third of the way down the page - there appeared a nondescript four column story under the header: 'Curbs on Money Market Funds'. As readers may be well aware, at the apex of the credit meltdown and banking crisis there was a veritable flood of investors toward safety, after seeing their investments in equities cratered. The first destination was money market funds, which are also the safest instruments available for most people with IRA or 401k holdings.

The FT article also pointed out:

"The SEC is to evaluate the merits of requiring a floating net asset value for money market funds rather than the stable $1 mark. Such action would involve substantial changes to the money market fund industry."

But WHY do that? This would introduce the very element of phantom or variable asset value (that exists in stock holdings) to now intrude into the "safe" money sphere. It would also let money market fund companies and managers off the hook, since if the share value is permitted to float, there will simply not be the same commitment  to adhere to the $1 value at all.

Untold was the underlying theme that this gimmick was in fact a hidden means of bailout for the bankster gamers and gamblers. Because of the risk of a new credit crisis (now increasing with student loan debt) we who hold safe investments would be required to aid in the next bailout. This, of course, is bullshit.

Getting back to the Minneapolis Fed bank chief (Neel  Kashkari's)  remarks and  contrary to Hillary's bloviations: "the 2010 Dodd Frank law did not go far enough".  He added that (ibid.): "the law hasn't ended the problem of banks so big that their collapse would endanger the financial system and economy forcing the government to rescue them in a crisis."

 Indeed, and those of us who've been paying attention have noted how the Reepos and their Maul Street lobby pallies have been gradually tweaking Dodd- Frank downward.  In the most recent (Dec., 2014) iteration, the Repukes snuck a last minute poison pill amendment into a critical  $1.1 trillion spending bill to keep the gov't open. The amendment allowed risky derivatives to be insured by Federal Deposit Insurance Corporation thereby setting the stage for a pre-emptive bailout if the CDS market goes south. See e.g. WSJ, A Warning Signal Flashes' (Feb. 12, p. C4), noting the market for credit default swaps - the same buggers that nearly crashed our financial system in '08 - are now on the rise again.  According to the Journal (ibid.):

"At the end of June the global CDS market was $14.6 trillion as measured by the total amount of default protection outstanding according to the Bank for International Settlements"

Do voters really want to risk another financial shit storm, and recession to make the last look like a jamboree? This is  the threat to which what Sanders is trying to awaken citizens. 

What are Kashkari's prescriptions for bank reform? According to the WSJ piece, "policy makers need to give serious consideration to":

- Breaking up large banks into smaller, less connected, less important entities

-  Regulating large banks like a public utility, or

- Taxing leverage through the financial system to reduce systemic risks wherever they may be

The Fed bank chief added, in a talk at the Brookings Institution (ibid):

"The financial sector has lobbied hard to preserve its current structure and thrown up endless objections to fundamental change. And in the immediate aftermath of the crisis when the Dodd-Frank Act was passed the economic outlook was perhaps too uncertain to take truly bold action. But the economy is stronger now and the time has come to move past parochial interests"

Indeed, and no surprise that Sen.  Sanders released a campaign statement after the speech saying he was "delighted" with Mr. Kashkari's position. Other citizens should also be once they wake up to what Sanders is saying, and repeating. (Well, as a former prof, if you repeat something often enough eventually it sinks into the student's cranium).

Let's also bear in mind Mr. Kashkari isn't some detached observer. During the financial crisis he ran the  $700 billion Troubled Asset Relief Program, an effort aimed at stabilizing the financial system by pumping capital into banks.

From this perspective of his experience, he likened big banks to nuclear reactors whose meltdown would be catastrophic and compared bank regulators to Transportation Security Administration workers checking shoe x-rays to thwart terrorist attacks. Kashkari is so concerned about the next big fail, that he's called for immediate proposals (such as those from Sanders) to attack big bank risk and to hold conferences and recommendations by year's end.

Are people, citizens paying attention? Or are Kashkari's and Bernie's calls for banking reform and the financial structure too abstract for most people to grasp and attend to?  They had better attend to it soon, and vote with their brains as opposed to believing more fake promises from pols who only want to get elected to "make history".

Again- A BAD Idea Proposed for Money Market Funds!

Money market funds might be called the life blood of capitalist society in that their (fixed income or nearly so) assets provide an important source of credit for companies which will then use it for expanding plant, or labor. In an environment in which credit is still very tight (thanks to the banks) this can be the difference between business failure and success. Hence, in any context in which one will be discussing jobs or the need to keep jobs or increase them, money market funds will have to enter the conversation.

Now, the tragedy is that these funds' assets appear to be shrinking as disclosed in the attached graphs from today's Wall Street Journal (p. 2, and front page 'U.S. Set Money-Market Plan'). As one can see from the left graph, the total U.S. assets have decreased from nearly $3.8 trillionin 2008 (when the financial crisis and especially the Lehman failure hit) to about $2.7 trillion now. Meanwhile, the number of these funds has decreased to 632.

Now, who invests in these funds? Largely little guy investors who are near retirement and don't wish to lose their shirts or homes in another stock market crash ...and make no mistake a new bubble is brewing what with Fed policies and cheap money (based on near zero interest rates) likely to continue through 2014. Thus, those within about 3 weeks of retiring, like my wife, must - to protect their nest egg assets- move 401k monies into an IRA which has basically only money market funds to offer as the safest option. (No Treasuries or bonds).

But what if, say, an investor who depends on this money to support a lengthy retirement wakes up one morning to discover that the total money in that IRA money market fund has shrunken by 50% or more? What then? What if the next day the total decreases another 20%? Then the next day it goes up maybe 10% but then down 15%? What kind of an effect do you suppose this will have on the prospective retiree who depends on a fixed income to make budgeting decisions?

And yet, evidently the illustrious Securities and Exchange Commission (SEC) as part of new proposals to "minimize any losses for shareholders in the event of another financial panic" (ibid.) are planning to "float" money markets, which means leaving them exposed to variable daily fluctuations like mutual funds - the very things that cratered most small investors 401ks in the 2008 crash! According to the WSJ piece:

"The SEC plans to propose scrapping the money funds fixed $1 net asset value and make it floatable like other mutual funds"

The problem, of course, is that money market funds aren't supposed to be "like other mutual funds" because they are supposed to be the last haven where small guy investors can go to preserve principal, as opposed to taking humongous losses in the stock market. (Realize here that mutuals are comprised of all the nasties resident in stocks, including derivatives that are buried in equities). In this sense, one can question the SEC objective "to minimize any losses for shareholders ". Because if floating NAV is on the table, what this really translates to is "letting them maybe lose their homes or cars but not their shirts and food". Minimized, get it! You still have a "floor" for maximum loss, but now a lot lower than before!

What is behind this nonsense? Enraged small investors faced with possible floating rates can blame a largely Gooper congress and the Dodd-Frank bill - which had to be tailored to what the GOP House wanted if it was to pass. That included absolutely, positively NO more government "bailouts" of any financial funds, including money markets. Recall here that the money market fund called "Reserve Primary" broke the buck (e.g. went below its designated one dollar parity NAV) in 2008 and at that time the ensuing panic subsided only after the Fed and the Treasury Dept. stepped in to backstop the funds and provide the $$ to ensure $1 parity. Well no more. According to SEC Chairwoman, Mary Schapiro, quoted in the WSJ article (p. A2):

"At the end of the day, the taxpayer simply can't be on the hook for failure, and the tools to ameliorate a run that existed in 2008 when Reserve broke the buck don't exist any more."

In other words, all the small investors, mainly soon to be or already retirees, are now on the hook for the losses if any, that a new panic brings. They - who are also taxpayers- now face losing principal as well as losing to inflation because of the Fed's zero interest, pro stock market policies. But as my wife observed, maybe that's why the SEC is taking this step, to drive people into the stock market via regular mutual funds.

The victim in any case is the money market fund holder, especially since money market funds are about the only safe (e.g. relatively fixed income) option afforded in most IRAs and 401ks. So, if floating share prices are now allowed, the money market investor may lose as much (theoretically) as if he were invested in certain "balanced" mutual funds, or index funds. Now sure, the float could also go upward, rewarding the investor, but once any variable share value emerges then we have speculation and propensity for market timing. Obviously, money market investors will attempt to play it so they cash out at the highest floated share price, not the lowest. This then introduces the same sort of gamesmanship that occurs in the Wall Street stock casino

Of course, this is only one of several major complaints of fund managers, others are concerned with new liquidity rules and lending. A "liquidity fee" is also being bruited about. Needless to say there are some unhappy campers. For example, J. Christopher Donahue of Federated Investors, Inc,. plans to sue the SEC if the new regulations interfere with his firm's ability to do business.

A worse consequence is that many small fry will pull money out of these things regardless, especially if the floating aspect is enacted. The end result could be the loss of trillions of dollars for business credit in an already low demand environment.

All in all, this proposal of floating the NAV for money market funds, which provide the ballast of credit for American businesses, is a horrific idea. It is much fairer to ALL money market investors to keep the $1 share price as the standard, and leave the variable rates optional for Funds that wish to offer more speculative instruments. The choice is therefore one the SEC needs to make for opt for minimal moral failure as opposed to "minimizing shareholder losses": i.e. not turn the immense money market sphere into another speculative domain - to the detriment of all cautious savers- who may need all the money they can muster to live off a lifetime income stream via annuities or RMDs.

They chose not to speculate in the stock market, and they should not now be compelled to do so in money markets. SEC, take note!