An email from law professor David Groshoff:
I'm responding to several of ProfessorBainbridge.com's recent posts regarding proposed reforms for money market mutual funds, partly contextualized by last week's SCOTUS opinion regarding insurance mandates and markets. I included Professor Davidoff on this e-mail, not only because he was the referenced author of one of those posts but also because I'm a Moritz alumnus who's always pleased to read our faculty's thoughts in thought-provoking outlets.
I'm uncertain if you were aware [you probably were, but just in case] that the ICI has maintained an affiliated insurance group, ICI Mutual, for quite some time. During part of that time ICI Mutual insured a meaningful number of money market funds against the risk of a fund's NAV proverbially "breaking the buck." Off the top of my head, this insurance existed until somewhere around 2003(ish?), when government-generated artificially low interest rates went from being a short-term phenomenon to an intermediate/longer-term drain.
Generally speaking, my recollection is that the default/break-the-buck insurance was in the form of an annual policy, with the cost of this insurance ranging from a few basis points for quickly fallen angel issuers [such as utilities during the Enron rolling blackout era] to progressively higher amounts for money market paper whose issuers found themselves on NRSRO ratings downgrade watches/outlooks or that began with non-perfect NRSRO ratings at the time of issuance. A number of interesting features existed in the policies that exceed the scope of this (already lengthy) e-mail.
Regardless, when we return to a more traditional interest rate environment where: (i) an insurance provider could charge a few (any?) basis points to funds to cover the cost of providing such insurance (ii) investors could still reap a near-market-rate of return for investing in "insured" short-term paper, and (iii) sufficient investment management fees could occur for the Money Market funds' RIAs/RICs, then perhaps money market insurance could again present itself as a better alternative to explore relative to additional layers of the currently discussed regulation.
Any suggestion of mine for an individual mandate on money market providers to purchase "break-the-buck-insurance" is strictly tongue-in-cheek. Having said that, however, perhaps an organically generated competitive insurance model in which multiple insurers potentially arise to diversify short-term paper default risk within money market funds in a competitive insurance landscape may be workable in a more traditional environment when rates return to where they'd more likely tend to be without Fed and other pressures maintaining current artificially low rates.
