The Derivative Project

Investors, Who Should You Believe About Money Market Reform: Wall Street or Economists and Commercial Banks

Investors, Who Should You Believe About Money Market Reform: Wall Street or Economists and Commercial Banks

Wall Street vs Commercial Banks

There is a war going on out there and most investors have no idea, yet Wall Street is insisting they know what is best for every investor.  No surprise, what is in the “investor’s best interest” is in Wall Street’s best interest.  Has your financial advisor warned you about the systemic risks that money market mutual funds pose?  Has your advisor suggested you move your cash to an FDIC insured sweep option that creates the exact same liquidity and advantages of a traditional money market fund? Did your financial advisor warn you about the potential collapse of the financial system due to trillions of dollars of non-collateralized credit default swaps?  Of course not.  Wall Street operates in the best interest of Wall Street, not the investor.

The SEC and the Financial Stability Oversight Council Believe Money Market Mutual Funds carry systemic risks.
What should your “financial advisor” insist you do, given the concerns that these funds pose systemic risk?
Move your money, in the short term, until these risks are controlled, to FDIC sweep option type money market funds, that carry FDIC insurance.  These funds still provide the same liquidity, the same return or better, with less risk.  Instead, your “trusted advisor” is submitting comments on money market reform to the Financial Stability Oversight Council that purport to be representing the individual investor.  These advisors are conflicted and they are simply stating in their comments what is in their best interest and their employer’s.  
Many of these advisors are fiduciaries and are being paid a fee to advise you.  This is a breach of the Investment Adviser’s Act of 1940.  These advisors are placing their interests over your best interests.  In this environment, the individual investor earns more money, with less risk, with the identical cash liquidity advantages, in an FDIC insured money market sweep account.
Are SEC Registered Financial Advisers breaching their fiduciary duty by recommending non-FCIC insured money market funds, that carry systemic risk, since they are not in the investors’ best interest?

Currently, non-FDIC insured money market accounts are not in the best interest of investors, but are in the best interest of mutual fund companies.  SEC registered investment advisers are conflicted in recommending non-FDIC money market funds to individual investors.
Here is a link to the Financial Stability Oversight Council’s (FSOC) website (Input fsoc-2012-0003) where one may read the comments from a few “financial advisors”.  There was not one personal financial advisor that expressed any concern about the systemic risk posed by money market mutual funds.  Every advisor simply stated investors love this product.  Why change it? 
Most investors would appreciate a more in-depth analysis of the pros and cons of a product that many economists and bankers believe pose systemic risk. As one The Systemic Risk Council:
Chair: Sheila Bair
The Pew Charitable Trusts, Former FDIC Chair
Ricardo Delfin
Executive Director to the Chairman & Special Advisor
Senior Advisor: Paul Volcker
Former Federal Reserve Chair
Brooksley Born
Former U.S. Commodity Futures Trading Commission Chair
Bill Bradley
Former U.S. Senator (D-NJ)
William Donaldson
Former U.S. SEC Chair
Harvey Goldschmid
Columbia Law School, Former U.S. SEC Commissioner
Jeremy Grantham
Co-founder & Chief Investment Strategist, Grantham Mayo Van Otterloo (GMO)
Chuck Hagel
Distinguished Professor, Georgetown University, Former U.S. Senator (R-NE)
Richard Herring
The Wharton School, University of Pennsylvania
Simon Johnson
Massachusetts Institute of Technology Sloan School of Management
Hugh F. Johnston
Exec. VP & CFO, PepsiCo
Ira Millstein
Legal Counsel to SRC, Chair, Columbia Law School, Center for Global Markets and Corporate Ownership
Maureen O’Hara
Cornell University Johnson School of Management
Paul O’Neill
Former CEO, Alcoa, Former U.S. Treasury Secretary
John Rogers
CFA, President and CEO, CFA Institute
Chester Spatt
Tepper School of Business, Carnegie Mellon University, Former U.S. SEC Chief Economist
Here is the Systemic Risk Council’s statement on the risks posed by money market mutual funds:
“The Systemic Risk Council (SRC) is writing to commend and support the FSOC for seeking public comment on proposals to reform money market funds. It has been more than four years of study since taxpayers were forced to guarantee money market funds and the structural risks remain. We believe strong reform – namely strong capital or a floating NAV – is essential to protecting the financial markets from the systemic risks posed by money market funds. Never again should policymakers be forced to choose between a financial meltdown o
r a taxpayer bailout of money market funds.”
Please note that none of these individuals currently have strong ties to Wall Street and many are trained economists and academics that are experts on the core structure of U.S. financial markets and the role of “money and banking” historically and in today’s global capital markets, to ensure a stable financial system.
Who is Speaking for Investors on Money Market Reform?
To speak for investors, Wall Street created a phony investor advocate, The Consumer Federation of America, that purports to be speaking for the average American investor.   The Consumer Federation of America is the spokesperson for Wall Street to ensure Wall Street is free to carry on their agenda, despite harm to the individual investor.  This is clear in the Consumer Federation’s support of Wall Street’s reluctance to put in the necessary changes to prevent future taxpayer bailouts, since these changes would cut into Wall Street’s profits.
Here is Wall Street’s (Investment Company Institute) website, Preserve Money Markets, For Investors, For America.   Remember, the Investment Company Institute is Wall Street.
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