Geithner ramps up call for money market fund fixes

By Peter Schroeder - 09/27/12 04:31 PM ET

Treasury Secretary Timothy Geithner is urging his fellow financial regulators to pressure one of their own to put in place tougher rules governing money market funds.

In a letter sent to fellow members of the Financial Stability Oversight Council (FSOC) Thursday, Geithner made the case for the Securities and Exchange Commission (SEC) to renew work on stalled efforts to strengthen rules for the funds He also called on the FSOC to do what it can to enhance oversight of the funds, which he believes are still susceptible to dangerous runs years after the financial crisis.

"Without further reform of MMFs, our financial system will remain vulnerable to runs and instability," he wrote. "With the failure of the SEC to act, the Council should now move forward with the tools provided by Congress."

Geithner, who chairs the FSOC, said the regulatory panel should lay out a set of options for overhauling the funds, seek public comment and make final recommendations to the SEC. Under the Dodd-Frank financial reform law that created the FSOC, the SEC would be required to either adopt that recommendation or explain in writing why it decided against it. He said he hoped to consider such recommendations at the FSOC's November meeting.

The FSOC is a regulatory body consisting of top financial regulators who meet regularly to assess the overall health of the financial system.

If the SEC is "unwilling to act in a timely and effective manner," Geithner also recommended other ways the FSOC could improve the safety of money market funds. For one, it could identify which firms in that industry pose a threat to the nation's financial stability and subject them to heightened oversight under the FSOC's powers. It also could apply heightened risk management standards to the industry as a whole if the SEC failed to adopt its own reforms.

SEC Chairman Mary Schapiro has been vocal in calling for tougher restrictions on money market funds, arguing that corner of financial markets remains susceptible to damaging runs and needs a better backstop.

These funds, which seek to maintain a share price of $1, are thought to be a highly secure investment, on par with bank deposits. However, the high-profile Reserve Primary Fund "broke the buck" at the height of the financial crisis after taking substantial losses in the bankruptcy of Lehman Brothers, setting off a run on the market that settled only when the government stepped in to guarantee over $3 trillion in investments.

She has not been alone in airing that concern, echoed by other top regulators, including Geithner and Federal Reserve Chairman Ben Bernanke.

But in August, the SEC had to call off a vote on publishing a proposed rule to overhaul regulation of the industry after Schapiro failed to garner the three votes on the five-member panel necessary to advance it. Democrat Luis Aguilar joined the two GOP commissioners, Daniel Gallagher and Troy Paredes, in opposing her plan.

Any effort to overhaul the funds have been met with fierce opposition from industry groups, who caution heightened regulations could stifle the financial product, reduce returns for investors and increase costs.