03 January 2010

Is the US Goverment Preparing the Lifeboats for the Next Financial Disaster?

Zero Hedge has an interesting review of proposed rule changes by the SEC and the Obama Administration which you can read in its entirety here.

Yet new regulations proposed by the administration, and specifically by the ever-incompetent Securities and Exchange Commission, seek to pull one of these three core pillars from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7.
The primary concern seems to be the new ability of money market fund managers to freeze redemptions (withdrawals) of funds at their discretion.
"A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to 'suspend redemptions to allow for the orderly liquidation of fund assets.'"

If you have the time, you should sit down and read through the entire essay at ZH, because it is fascinating. I understand that many will not because of the length and density of the piece, which is really not all that bad, and fairly well written as all of their pieces tend to be. I am not so adverse to some of the other changes in the MMFs such as the tightening of durations, but that is more a quibble.

One also has to wonder if and when the government will begin to more aggressively manage the access of private citizens to their 401K's and IRA's and other forms of savings. Or is it just sufficient to manage the things that one might hold in them. Hard to say.

Now that the government will be forcing Americans to buy private health insurance (and presumably use it to prevent certain trasmittable diseases for the public good as your private health insurer will have your records) where will they stop? What about life insurance, long term disability insurance, and retirement plans? How about psychological counseling and sensitivity training for social malcontents? "A gram is better than a damn."

Here is the concluding paragraph from this essay and I wanted to highlight it here because otherwise it will be overlooked by many who should read and understand it. The conclusions that the author draws about WHY the changes are being made are more important perhaps than the changes themselves. Or at least to me, because I have very little money in any US money market fund, and even that is 100% short term Treasuries. The fraud and mispricing of risk in the US financial system has become pervasive and epidemic, such that a good stiff headwind could have taken it all down, and because of a lack of serious reform, still can. Rather than fixing potential causes of the next disaster, the Obama Administration seems content to block the escape routes and issue priority passes to the big Wall Street banks and a favored few.

"At this point it is without doubt that even the government understands that when things turn sour, and they will, the run on the bank will be unavoidable: their solution - prevent money from being dispensed, when that moment comes. The thing about crises, be they liquidity, solvency, or plain-vanilla, is that "price discovery" occurs all at once, and at the very same time. And all too often, investors "discover" they were lied to, as the emperor, in any fiat system, always has no clothes.

Just like in September 2008, when the banks were forced to look at each-others' balance sheet and realize that there are no real assets on the left backing up the liabilities on the right, so the moment of enlightenment occurs are the most importune time: just ask Hank Paulson. Had he known his action of beefing up Goldman's FICC trading axes would have resulted in the "Ice-Nine'ing" (to borrow a Mark Pittman term) of money markets, who knows- maybe Lehman would have still been alive. Perhaps risking the cash access of 20% of US households and 80% of companies was not worth the few extra zeroes in Goldman's EPS. But we will never know.

What we will know, is that now i) the government is all too aware that the market has become one huge ponzi, and that all investment vehicles, even the safest ones, are subject to bank runs, and ii) that said bank runs, will occur. It is only a matter of time. And just as the president told everyone directly to buy the market on March 3, so the SEC, the Group of 30, and Barney Frank are telling us all, much less directly, to get the hell out of Dodge. Alternatively, the game of "last fool in", holding the burning hot potato, can continue indefinitely, until such time as the marginal utility of each and every dollar printed by Ben Bernanke is zero."
This Is the Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied - ZeroHedge
Stand your ground and wait. All is well. Someone has to take the big hit while the important people are transported to safety.

The only constraint on the Fed's printing money is the acceptability (marginal value) of the Bond and the dollar, which is the bond of zero duration. And the people making the decisions about printing and distributing those dollars are more unworthy of holding such power than you might imagine, even in your lowest expectations.

And if, even now, you do not 'get this' then the next ten years could be particularly disappointing.