Steven Davidoff sent along this reply to my post about why a floating NAV for money market funds is a bad idea:
I take your point that pricing according to NAV will create both tax and accounting problems. But I wasn’t advocating for that as a solution (it may very well be the one, but that is another discussion and you make an excellent point against). What I was saying is that right now money market funds are designed to run perfectly and never fail, yet they are inherently unstable akin to banks. I believe this makes issuers less likely to rely on them for funding and depositors less likely to use them. Now, the solution to this problem is to make the system more stable. This could take the form of an NAV pricing requirement, but it could also be a capital requirement, or it could be another proposal like Jeff Gordon’s dual class shares proposal which seems to solve much of the tax and accounting problems. I’m sure that you could also come up with something if you put your mind to it. While nothing is very certain finance seems to be rather good at finding creative solutions to problems, and I am not sure why this shouldn’t be the case here, but perhaps I am too optimistic. In any event, the ultimate point is that the inherent instability of these funds is a remaining problem that should be addressed before another fund inevitably breaks the buck, and that in the meantime the industry is only hurting itself.
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