To protect the financial system from the prospect of a national run on money market funds by panicked investors, the Obama administration has proposed the once unthinkable prospect of a floating net asset value (NAV) for money market funds.

The $1 peg, or lack thereof, became an issue last September when the NAV of Reserve Management Company's flagship product, the Reserve Primary Fund, value fell below $1 per share. Its decline was soon followed by other reserve money market offerings.

Don't Break the Buck
Breaking the buck is the ultimate taboo for an investment sold to investors as a stable place to park cash. The prospect of widespread failure in money market funds prompted the United States government to launch an insurance program to guarantee the value of money market assets. That short-term, taxpayer-funded fix isn't something the Obama administration wants to see remain in place forever.

A floating NAV would also get the government out of the business of subsidizing the failing investment offerings sold by legions of financial services firms.

Keep in mind that investors are still struggling to get their money back from the reserve funds, which are incorporated in the British Virgin Islands, where they are legally permitted to make partial distributions in response to investors looking to cash out.

Downstream Impact
For investors, a floating NAV means that the value of money market shares, like the value of other mutual fund shares, would rise and fall on a daily basis. Anybody using a money market account as safe place to store cash would need to rethink that plan.

Likewise, any individual investor or business using money market funds for check-writing purposes would want to put their money somewhere safer.

The financial services industry has responded to this proposal with extreme anxiety. A move away from the stable $1 NAV would likely be the kiss of death for their money market businesses.

The industry favors an alternative proposal whereby money market providers would need to have access to private cash to maintain the $1 peg and keep investors whole. (What happens when banks or brokerages go belly up? Check out Bank Failure: Will Your Assets Be Protected?)

The Bottom Line
For the moment, industry players and investors alike are watching and waiting to see how the final legislation will shape up. If the NAV floats, the financial services industry loses a product and investors need to find a new place to stash their cash.

If the new rules require private funding to prop up failing funds (many of which are only maintaining the buck peg today because the firms that sell them have reduced their fees), it will be business as usual in the money market world. Either way, the taxpayers will have one less Wall Street mess on their hands. (U.S. bailouts date all the way back to 1792. Check out Top 6 U.S. Government Financial Bailouts.)

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