Christopher Donahue, chief executive officer of FederatedInvestors Inc., is sticking up for the family business when hedefends money-market funds.

Donahue, whose family-controlled firm has three-fourths of itsassets in the cash-like products, is the most outspoken opponent ofan effort to impose new regulations on the $2.6 trillion industry.Donahue, who refers to the funds as “the eighth wonder of theworld,” called one of the proposals “totally brain dead” in aninterview.

“How can I defend them with anything but passion,” Donahue, 63,said in the interview at Federated's Pittsburgh headquarters fromhis office overlooking the Allegheny River. “I've got passion forthe beauty of money funds.”

Donahue's lobbying campaign, aided by allies in the mutual-fundbusiness and in Congress, may defeat a lineup of regulators pushingfor change in the wake of a 2008 fund collapse that sent clientsfleeing from the industry. Securities and Exchange CommissionChairman Mary Schapiro, who along with Treasury Secretary TimothyF. Geithner and former Federal Reserve Chairman Paul Volcker haschampioned rules to make funds safer, can count on only one backeras her five-member agency prepares to vote on the proposals asearly as this month.

The fact that Schapiro has yet to bring the matter to a showdownis telling, said John Hawke, a Washington lawyer who representsFederated.

“The measure of Chris's success is that the chairman has beentalking about this since early in the year and nothing hashappened,” Hawke said in a telephone interview.

Should Donahue prevail, the U.S. financial system will be morevulnerable to instability, Douglas W. Diamond, a finance professorat the University of Chicago Booth School of Business, said in atelephone interview.

“The industry is being shortsighted about risk,” Diamondsaid.

John Donahue, Christopher's father, started Federated in 1955 tosell mutual funds. The senior Donahue previously sold funds fromother companies door-to-door in the Pittsburgh area.

Christopher Donahue joined the company in 1972, a year after thefirst money-market fund was introduced. The product gave investorsaccess to a liquid account that also earned a market rate ofinterest.

By 1975, he was selling Federated money funds to bank trustdepartments in New Jersey and Georgia. Because the concept was sonew, he didn't always get a warm reception.

“I was thrown out of plenty of trust departments,” Donahuesaid.

Asset Growth

Federated's money-fund assets rose along with the industry's,the result of both organic growth and acquisitions. The firm rankedsecond in money-fund assets at the end of July, behind onlyBoston-based Fidelity Investments and New York-based JPMorgan Chase& Co., according to research firm Crane Data LLC inWestborough, Massachusetts.

Money-market assets in funds and separate accounts, at $265.5billion, accounted for 75 percent of Federated's $355.9 billion inassets and 47 percent of revenue in the second quarter, the companyreported in July. At Fidelity, money funds made up 27 percent ofassets as of July 31. At JPMorgan, they were 35 percent as of June30.

Federated remains a family affair. Donahue's father, 88, isstill the chairman, and his brother Thomas is the chief financialofficer. John Donahue has 13 children and 84 grandchildren, and ahandful of other relatives have worked at the company, ChristopherDonahue said. The family owns a separate class of stock that allowsit to maintain control.

The Federated sign on top of the firm's building is one of themost visible in the city skyline. Donahue, fit and trim, brought amarked-up, inches-thick copy of the 2010 Dodd-Frank Act to theinterview. Dodd-Frank established, among other things, theFinancial Stability Oversight Council, a multi-regulator panel thatcould impose restrictions on money funds should the SEC fail topass Schapiro's proposal.

Money-market mutual funds, which hold short-term debt and areused by clients for liquidity, are the biggest source of short-termcredit in the U.S. They're part of the so-called shadow bankingsystem, along with hedge funds and other institutions that providecash globally and are not subject to banking regulation.

The business has drawn scrutiny since the September 2008collapse of the $62.5 billion Reserve Primary Fund, which held debtissued by Lehman Brothers Holdings Inc. Its shutdown a day afterLehman's bankruptcy triggered an industry run on funds eligible tobuy corporate debt, helping to freeze global credit markets.

Investor Run

The run abated only after the U.S. Treasury guaranteedmoney-fund shareholders against losses on more than $3 trillion insecurities for a year and the Fed began financing the purchase offund holdings at face value to help them make redemptions. Congresshas since prohibited the Treasury from acting in the same way.

The SEC passed rule changes in 2010 designed to strengthen thefunds. Schapiro has said more action is needed. Her proposal wouldforce funds to abandon their fixed $1 share price or introducewithdrawal limits and capital buffers.

Without the changes, money funds remain susceptible to runs,Schapiro told the Senate Committee on Banking, Housing and UrbanAffairs in June.

“It is essential we address this risk now rather than waitinguntil the middle of the next crisis,” she said.

Schapiro has received public backing from Boston Federal ReserveBank President Eric Rosengren and New York Fed President WilliamDudley.

The Boston Fed this month released a report showing that atleast 21 money-market funds got support from their sponsoringcompanies to prevent shares from falling below the fixed $1 priceduring the financial crisis. “The status quo is not acceptable,”Rosengren said in an April speech.

“Reforms are necessary to protect the economy from financialinstability in the future,” Dudley wrote in a Bloomberg View columnAug. 15.

Donahue, on a conference call with investors in January, saidthe SEC proposals would destroy the industry and likened the twomain ideas — floating prices and capital buffers — to a choicebetween dying “by hanging or by bullet.” He threatened legal actionto block the rules from being implemented.

In conference calls, congressional testimony and speeches, hehas offered a narrative of the role money funds played in the 2008crisis that differs from the one conveyed by regulators. The exodusthe funds experienced was the result, not the cause, of the broadermeltdown, he said.

Lobbying Effort

The run on money funds was the only one in the industry's40-year history, according to Donahue. Shoring them up didn't costthe federal government any money, and the 2010 changes made thefunds resilient enough to handle the stresses they are likely toface, he said.

Donahue's conclusion — that the SEC's ideas threaten thesurvival of the money-fund business — has won support from othermutual-fund firms. Fidelity Investments, in a March letter to theSEC, said the proposed reforms “will ultimately destroy themoney-market fund industry.”

The 10 biggest money-fund managers and the Investment CompanyInstitute, a Washington-based trade group, reported combinedlobbying spending of $16 million in the first half of 2012 indisclosures that reference money funds, according to a review ofdocuments by Bloomberg News. That compares with $16.7 million inall of 2010. Federated pitched in $230,000.

Donahue has wooed corporate treasurers and state officials, twoconstituencies that issue securities purchased by money funds.

“I will speak to anyone who will listen,” he said in theinterview. He has also found friends in Congress, includingPennsylvania Republican Senator Patrick Toomey. Toomey, at the Junehearing, defended money funds with some of the same languageDonahue has employed.

Winning allies hasn't been difficult because money funds arepopular, according to Donahue.

“There is still $2.6 trillion in these funds even though thereis no yield,” he said. “People love them.” Money funds yielded anaverage of 0.06 percent as of Aug. 15, according to Crane Data.

Interest rates near a record-low have forced money fundproviders to waive fees on some funds to prevent yields fromturning negative, which has undermined profitability.

Making Acquisitions

Federated has risen 1.3 percent since the Federal Reservelowered its target rate to a range of zero to 0.25 percent inDecember 2008, compared with the 26 percent average gain for theStandard & Poor's 20-member index of asset managers and custodybanks. The firm has continued to make acquisitions during thattime, including a pending deal announced in April to acquire $5billion in money-fund assets from Cincinnati-based Fifth ThirdBancorp.

Donahue, at the June hearing, sparred with David Scharfstein, afinance professor at Harvard Business School and member of theSquam Lake Group of academics who have recommended steps tostrengthen the U.S. financial system.

When Scharfstein, in response to questioning, said money fundsshould have to raise capital equal to 2 percent to 3 percent oftheir assets, Donahue said, “The math doesn't work.” In theinterview, he said of the suggestion, “It's totally brain dead. Itwould be too expensive.”

Donahue is “on the fringe of the industry,” Scharfstein said inan interview.

It's up to academics and regulators to challenge vestedinterests opposing change, according to Scharfstein.

“We need a safer system,” he said.

The SEC has yet to set a date to vote on Schapiro's proposals,John Nester, a spokesman, said in an e-mail. Schapiro has thesupport of Democrat Ellise B. Walter at the SEC, while Republicancommissioners Troy A. Paredes and Daniel M. Gallagher have saidthey oppose the plan. Commissioner Luis A. Aguilar, who wasreappointed last year by President Barack Obama, has signaled hisopposition without saying whether he would kill it before invitingpublic comment.

Donahue sees the latest tangle over money funds as part of along-running war the industry has fought with the Fed and theSEC.

“It was rather like they were standing outside the delivery roomwhen these things were born trying to club them,” he said at aninvestor conference in June.

'POW Camp'

Volcker, in a September 2011 speech, spoke in favor of tougherrules.

“The time has clearly come to harness money-market funds,” hesaid. Volcker told the Financial Crisis Inquiry Commission in 2010that most of the cash in money funds “should be with the banks”because they are more tightly regulated.

Donahue told his staff to prepare for more confrontations, hesaid in the interview.

“We are in a POW camp behind enemy lines, trying to survive,”Donahue said. “I assume the battle continues. We will defend moneyfunds come what may.”

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