Chamber tells Geithner to back off on money market funds

By Peter Schroeder - 11/05/12 05:04 PM ET

The nation's largest business lobby is calling on Treasury Secretary Timothy Geithner to abandon his efforts to push reforms to money market funds across the finish line.

The U.S. Chamber of Commerce told Geithner Monday that his efforts to bring about an overhaul of that corner of the financial markets repeats the "flawed approach" originally taken by the Securities and Exchange Commission (SEC).

"The council’s mad dash to a predetermined outcome not only could jeopardize an important intermediary for investors and state and corporate finances, but it could also unnecessarily compromise the integrity of our regulatory system," wrote David Hirschmann, head of the Chamber's Center for Capital Markets Competitiveness. "We urge you to take these risks into account before hastily interjecting the Council in the money market mutual fund regulatory process."

In September, Geithner called on his fellow financial regulators on the Financial Stability Oversight Council (FSOC) to pressure the SEC to complete reforms to the money market fund industry. SEC Chairwoman Mary Schapiro has long pressed for heightened regulation of the funds, which she argues are susceptible to runs. But her efforts were stymied in August, after she failed to garner enough support from her fellow commissioners to advance a reform proposal.

After that stalled effort, Geithner called on the FSOC to use its new powers, granted by the Dodd-Frank financial reform law, to compel the SEC to act. Under the law, the FSOC has the power to make recommendations to a financial regulator on a course of action, which the regulator would then have to either accept and implement or explain in writing its inaction.

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

Meanwhile, the Chamber has been leading an industry charge against efforts to beef up oversight of the funds. In the latest letter, it argues that the SEC, and now the FSOC, have failed to conduct the necessary research on funds to determine appropriate action.

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, unlike bank deposits, they are not guaranteed by the government. When 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, it set off a run on the market that settled only when the government stepped in to guarantee more than $3 trillion in investments.

The chamber contended that investors know the risks that come with using the funds, adding that they are a major source of funding for state and local governments.