HEARD ON THE STREET
March 25, 2012, 3:21 p.m. ET
Banks: Show Investors the Money (Funds)
By MARTIN GONZALEZ And DAVID REILLY
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In a postcrisis world, big banks shouldn't be allowed to ignore uncomfortable realities. Yet when it comes to money-market funds, J.P. Morgan Chase, JPM +1.14% Wells Fargo, WFC +0.52% Bank of America BAC +2.60% and Citigroup C +0.64% have asked for special treatment allowing them to do just that.
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Money-market funds aren't explicitly guaranteed by their sponsors. And yet in recent years, they have received considerable support from them and, in the wake of Lehman Brothers's collapse, the federal government. Such implicit support, many banks and fund managers acknowledge, means looming accounting-rule changes could potentially require them to show money-fund assets on their books.
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Banks and asset managers are also worried that possible regulatory changes being contemplated by the Securities and Exchange Commission, in particular calls for money funds to have a capital buffer, could also mean them coming on the balance sheet.
.The banks' solution: Create an outright exception to any new accounting rules. That was included in comment letters filed by banks and fund managers with the Financial Accounting Standards Board, which is updating rules on how to gauge and treat ownership interests.
.This is an added wrinkle to the regulatory debate swirling over the $2.6 trillion money-market industry. The aim is to prevent destabilizing runs, as occurred when one fund "broke the buck" during the financial crisis. But current proposals don't address the fact that many investors still believe that money-market funds are as safe as bank accounts. They are actually mutual funds that can suffer losses.
.Meanwhile, the industry continues to fight the idea of requiring money funds to post floating unit values, like regular mutual funds. Right now, they are always priced at $1 a share, furthering the impression they are akin to bank accounts. The rigid unit value also can lead sponsors to support the funds in times of trouble, lest a fund posts a loss and investors flee.
.Yet this flies in the face of postcrisis accounting rules meant to rein in off-balance-sheet vehicles. These often require companies to recognize on their books assets they implicitly support—or assets that they would likely back to avoid reputational harm.
.Citi illustrated this problem early on in the crisis. It implicitly supported Structured Investment Vehicles, or SIVs, but didn't have them on its books.
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When these vehicles ran into trouble, Citi took nearly $60 billion of their assets onto its balance sheet, rather than anger clients.
.Money-market funds are seen as far safer than SIVs. And they are tightly regulated. Yet the implicit support banks offer them opens the door to similar balance-sheet risk.
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Banks are worried that any such accounting or regulatory changes could force them to bulk up their balance sheets and increase leverage. In addition, they argue that consolidating fund holdings would make their financial results less useful and possibly undermine the role money-market funds play in providing short-term funding to companies.
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Yet that same argument led FASB early last decade to water down rules meant to restrict off-balance-sheet vehicles. That allowed them to proliferate, and for leverage and risk to build unseen within the financial system.
.That makes the FASB's initial position, against banks having to show money-fund holdings on their books, strange. It risks a repeat of their decade-earlier mistake.
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There is a simpler approach. Instead of exemptions, banks should be required to make clear to investors that money funds are like other mutual funds, that there will be no backstop and that losses are possible. If banks aren't willing to do so for fear of losing business, they should accept the consequences and show the assets on their books.
.In this case, there is no reason for banks to have their money-fund cake and eat it, too.
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