Schapiro’s effort collapsed in late August 2012 when Aguilar, Gallagher and Paredes told her they would vote against it, a rare move to block a proposal from being issued. Aguilar said the staff’s proposal was too narrow and should analyze “the cash management industry as a whole and the effects of the 2010 amendments.”
Money-market mutual funds first appeared in 1971 as a higher-earning substitute for bank deposits, whose interest rates were capped by the Federal Reserve. Thousands of households and businesses use them as a safe place to park cash, though unlike bank accounts they’re not federally insured.
For investors, the appeal of money funds stems from their stable pricing of $1 a share, implying that the value of the principal won’t decline.
Investor Stampede
Only two money funds have ever dropped below $1. The $35 million Community Bankers U.S. Government Mutual Fund was too small to cause wider fallout when it blew up in 1994. The Reserve Primary Fund proved to be a bigger deal in September 2008.
Unsure of the safety of other funds and the stability of other large banks, companies and large institutions across the world responded to Reserve Primary’s troubles by stampeding out of scores of money funds, known as prime funds, that held commercial paper. One large sovereign wealth fund pulled more than $10 billion from BlackRock Inc. in a single withdrawal, according to an employee of the money manager who asked not to be named because the information wasn’t public.
Money-market funds are the largest collective buyer of U.S. commercial paper, and their sudden withdrawal caused the market to seize up. Companies with outstanding paper faced possible insolvency because they couldn’t roll maturing debt into new issues.
No Net
After the crisis, Schapiro aimed to prevent another seizure in the commercial paper market more than she sought to protect investors in any one money fund. That mission gained urgency after Congress stripped the Treasury and Fed of their abilities to bail out money funds.
“This core part of our financial system is now operating without a net,” Schapiro told the Senate Banking Committee on June 21, 2012.