"For both money funds and the companies that run them, the best policy is to clarify that they are not banks and are not insured by the taxpayer.
The federal Financial Stability Oversight Council is threatening to slap the too-big-to-fail label on asset managers that are clearly able to fail, and should be allowed to fail if they ever stop serving the customer.
The balance sheets at BlackRock and Fidelity show that neither is anywhere near the size of a giant bank. The funds that these companies manage can rise or fall in value without posing any threat to the financial system. Fund investors will gain or lose, and the investors know this. The principal systemic threat here is regulatory incompetence—if the Beltway crowd manages to persuade investors that they will be protected in a crisis.
That's what happened with money market mutual funds.
...After federal regulators allowed money funds to report their values at a fixed $1 per share—even though the underlying assets were sometimes worth slightly less—customers came to see the funds not as investments, but as rock-steady accounts similar to bank deposits. When this accounting fiction was exposed in 2008, a taxpayer rescue ensued.
The part of the mutual fund industry that failed in 2008 is the part in which funds act like banks. The solution is to make these funds act as investments, not to export their shortcomings to other funds by turning asset managers into taxpayer-threatening banks."
Wall Street Journal Editorial Board
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