Federal Deposit Insurance Corp. Chairman Sheila Bair calledmoney-market mutual funds “destabilizing” to the financial systemand said investors would be served just as well if share pricesfloated.

“Money-market funds are maintaining a fiction of a stable”net-asset value, as shown by the September 2008 failure of the$62.5 billion Reserve Primary Fund, Bair said yesterday at around-table meeting of fund-company executives and regulatorsarranged by the U.S. Securities and Exchange Commission inWashington. “That is skewing investment dollars into a structurethat is highly unstable in a crisis.”

Former Federal Reserve Chairman Paul A. Volcker called afloating share price the “simplest” solution to the risk posed bymoney funds, which trade at a constant $1 a share.

Their remarks lent support to proposals fund executives havesaid may ruin the product's appeal to investors, and its role asthe biggest collective provider of short-term financing for U.S.corporations through the commercial-paper market. Calls to makefunds safer began after Reserve Primary's collapse helped freezeglobal credit markets. The SEC, after passing rules last year thatmade funds more liquid and more transparent, is considering whetherfurther changes are needed.

Representatives of Fidelity Investments, JPMorgan Chase &Co. and Federated Investors Inc., the three biggest money-fundproviders, defended the business as popular among investors andcrucial to the financing of U.S. companies and municipalities.

Capital Requirements The industry has saidbank-like regulations, including capital requirements or forcingfunds to abandon their stable $1 share price, would destroy theirappeal to customers while failing to prevent runs.

Money funds book their holdings based on their value at maturityand round to the nearest cent, allowing customers to buy and sellshares at $1. Returns are distributed monthly in cash or newshares.

Reserve Primary suffered a loss, initially set at 3 percent ofassets, on debt issued by bankrupt Lehman Brothers Holdings Inc.,causing the fund to close on Sept. 16, 2008, and denyingshareholders access to most of their cash for months as itliquidated.

Investors, fearing that other funds might “break the buck,”withdrew $230 billion from the industry by Sept. 19 in a run thatthreatened to cripple issuers of short-term debt.

Volcker has previously said the stable share price creates anincentive for investors to flee at the first sign of trouble.

Preventing Panic The government in 2008 “had torun from one extreme action and safeguard to another” to preventadditional money-fund failures amid the panic, Volcker said atyesterday's meeting.

“What is the public good that makes it worthwhile to run such abig risk?” he said.

The run on money funds that followed Reserve Primary's collapseabated only after the Treasury Department guaranteed shareholdersagainst losses and the Federal Reserve loaned money to purchasefund holdings at face value.

Robert Brown, head of Boston-based Fidelity's money-market fundgroup, said rules already enacted by the SEC had made the industrybetter prepared to handle a run by investors. The changes forcedfunds to hold more in securities easily convertible to cash and toreveal more about their holdings.

“There is a great danger in looking at all sorts of mechanismsfor reinventing the money-market fund business,” said John D.Hawke, of Washington law firm Arnold & Porter LLC, whorepresented Pittsburgh's Federated. “The danger is that people whofind money-market funds extremely useful will be denied theusefulness of those funds.”

Government 'Subsidy' The regulators at theforum examined two industry proposals for backing money funds withemergency liquidity. A plan put forward by the Investment CompanyInstitute, the mutual-fund industry's Washington-based trade group,was criticized for its provision that in a crisis funds shouldenjoy access to the Fed's discount borrowing window.

“You are in effect asking for some kind of subsidy to betransferred from the federal government to the corporate sector andthis is a distorting thing,” said Paul Tucker, deputy governor ofthe Bank of England.

U.S. Treasury Undersecretary Jeffrey A. Goldstein questionedwhether the proposed facility's size, $24 billion after 10 years,would be “even close to enough.”

Goldstein was one of six present representing the FinancialStability Oversight Council, the regulatory panel charged withaddressing companies and activities that can endanger the U.S.economy. The council was created by last year's Dodd-Frank Act.

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