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.)

Related Articles
  1. Credit & Loans

    Pre-Qualified Vs. Pre-Approved - What's The Difference?

    These terms may sound the same, but they mean very different things for homebuyers.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  4. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  5. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  6. Economics

    Will Putin Ever Leave Office?

    Find out when, or if, Russian President Vladimir Putin will ever relinquish control over the Russian government, and whether it matters.
  7. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  8. Markets

    Will Paris Attacks Undo the European Union Dream?

    Last Friday's attacks in Paris are transforming the migrant crisis into an EU security threat, which could undermine the European Union dream.
  9. Budgeting

    How Much Will it Cost to Become President In 2016?

    The 2016 race to the White House will largely be determined by who can spend the most money. Here is a look at how much it will cost to win the presidency.
  10. Options & Futures

    Understanding The Escrow Process

    Learn the 10 steps that lead up to closing the deal on your new home and taking possession.
  1. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  2. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  3. Are mutual funds considered cash equivalents?

    Though all mutual funds are considered liquid assets, only certain funds are considered cash equivalents. What Is a Cash ... Read Full Answer >>
  4. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  5. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  6. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center