Say goodbye to money market funds, and hello to more volatility, whether in money market funds, or their substitutes.  As with all of the financial crisis, it would have been better if the Fed and Treasury had not intervened.  Most money market funds would have survived.  The market panicked less than the regulators did.

But now we have the capitulation of Luis Aguilar, perhaps giving in to the pressures of the banks that hate competition from the money market funds.  Who is more powerful? Banks.  Where are there more systemic losses?  Banks.

Money market funds are not the problem.  If there is a crisis, let them fail.  The losses will be ~2% of principal; banks will do far worse.

Publishing the net asset value of Money Market Funds will destabilize them; rising NAVs will attract more money, and falling NAVs will lead to a run on the MM funds.   It is a recipe for disaster.

Far better is my proposal, which is an excellent compromise.

To those analyzing policy for money market funds at the SEC:

Greetings. My name is David Merkel, and I run Aleph Investments, LLC, a Maryland RIA. I manage stock and bond portfolios for upper middle class people, and for small institutions. I am a Chartered Financial Analyst, and in the past, I was a life actuary, where I developed stable value products for pension plans.

It is much harder to assure a stable share price with longer dated assets, but I was able to do so via a variety of strategies. Doing the same thing for money market funds is simple.

Before I continue, I want to make clear that I have no economic interest in money market funds, aside from being an investor in them. At present, the SEC is proposing a variety of changes to money market funds that practically render them uneconomic. No wonder the companies managing the MM funds oppose that.

But the companies managing the MM funds are unrealistic as well, they don’t see any reason for change. I have a proposal that splits the difference, and is trivial to carry out.

My proposal says this: Funds calculate their internal NAV, but do not disclose it to the public. They only disclose it in the rare case where the NAV drops below 0.995, and it would “break the buck.”

When a fund “breaks the buck,” it announces a credit event. It tells shareholders that they have lost money, and to protect the interests of all shareholders, all shareholders will suffer a small capital loss.

Whatever the fairly calculated NAV is when a capital loss is announced, the new NAV would be 1.0025, and the number of shares reduced to the level that supports that NAV. If the value of the assets has been accurately calculated, and there are withdrawals, the premium to NAV should rise, not fall, for the remaining shareholders.
As an example, imagine a fund makes bad decisions, and the internal NAV calculation reveals an NAV of 0.9825. The fund would announce a credit event, and roughly 2% of all units would be lost, and the new internal NAV would be 1.0025. Those leaving the next day would only strengthen the fund.

Few will like the concept of a credit event in money market funds. That said, the idea would have many salutary effects on money market funds:

  1. It would eliminate runs on the funds.
  2. It would get people used to the idea that there is some risk in money market funds, though limited.
  3. It would eliminate the need for the government to intervene and insure money market funds.
  4. It would allow some money market funds to take more risk, and offer more return. There would be less need to constrain maturity and credit quality of the investments in the MMFs so tightly.
  5. The cost would be minimal, most of the time losses would be 1-2%, which would be paid for through interest in less than a year.

My proposal is better because it treats money market funds like ETFs — they are pass-through vehicles, and as such, do not need capital buffers.

And, my proposal is better, because it recognizes that credit events should be rare but acceptable aspects of how money market funds work. Think about it: particularly when short term interest rates are so low, there is no way for interest to cover even the slightest discrepancies versus NAV.

Under my way of doing things, let there be stable net asset values, freedom in investment guidelines, but the possibility of credit events. The present set of restrictions in investing does no one any good, because the problem is not length of maturity or credit quality, but issuer concentration.

But let money market fundholders analyze the tradeoff between yield and risk. Guess what? Short-term bond fund holders have to do the same thing.

But why are we going after money market funds? When they fail, the cost is pennies on the dollar, and it rarely happens. Why not go after banks? They fail far more frequently, with much larger losses. I say let money market funds fail, and do not increase regulations on them. Rather, let them be like ETFs, and let them be constrained by the prudence of the free markets. What? You can have investment without the possibility of loss? Ridiculous.

Regulate the banks tightly, but let money market funds go free, but advertise that losses are more than possible.
I strongly urge that you adopt my proposal. The money market funds will not like it, but they can live with it. The SEC may not like it entirely, but it accomplishes all of goals that you care about. This is a compromise proposal where everyone can win.


David J. Merkel, CFA, MA

To my readers, I only ask one thing — do you have contacts at Fidelity, Vanguard, Federated, ICI, etc., who care about this?  I wa able to put my proposal before the SEC through Commissioner Luis Aguilar.  I talked with two senior attorneys at the SEC in August.

But I am a political nobody.  I may have a bright idea, and many have told me that, but I need an entity with political clout to absorb my idea, and use it.  I don’t care if I get credit; I just want to do something good to minimize regulation, but deliver bad results to those who choose bad managers.

All that said, if the SEC acts as it is indicating, they will destroy money market funds, and we will all be the poorer for it.

In investing, focus is important.  We have to divide the world into what we can and can’t control.

Will North Korea (snicker) or Iran (no snicker) get nuclear arms?  I can’t control that, an I am not sure what I would do if I knew what would happen.

Will the Fed move to inflate goods prices, as opposed to their quantitative easing which mostly affects asset prices?  Or will they look to protect nominal values of debt, and deflate?

There are many things that I don’t know; if I did know the future with certainty, I am sure that most other people would know it at at least a lesser level of certainty.

So focus on what you can control, rather than what you can’t.

  1. You can control your own behavior.  You can’t control the behavior of others, whether it is those who invest alongside you, or manager behavior, or that of clients who invest more and less at the wrong times.  Optimal behavior might mean buying things out-of-favor after the fury of selling has gone cold.
  2. If you are a manager, you can guide, but not control client expectations.  You can educate them on your willingness to take risk, but you can’t control their emotions.
  3. As a manager, you can tell investors the mandate toward which you are managing — and then you must manage within it, because your investors expect it.
  4. You must match the liquidity of investments to the need for liquidity.  Value investors must stress patience.  Hot money investors must keep things liquid.  The same applies to time horizon.
  5. Market conditions may be depressed or ecstatic.  You can’t control movements in the mood of the market, but you can adjust your position so that you can benefit from likely future change, if valuation measures are extreme.

This is one reason why I try to limit the number of decisions that I make, for myself and clients, while trying to make better decisions for all of us.

In general, I think better investment decision-making stems from diversification where you don’t know more than the market, and concentration where you do know better.




  • Depression Deepens Greek Middle Class Despair With Crime They need to leave the euro & end early retirement $$ Dec 07, 2012
  • Global Shipping Industry’s Troubles R Threat for Biggest German Banks During good times bankers forget cyclicality $$ Dec 06, 2012
  • All recent French Presidents are good examples of why the power of the office should be weakened & term shortened $$ Dec 06, 2012
  • Don’t Tax Our Wine Irish Cry as Austerity Finds Threshold Alcohol exists 2 prevent the Irish from ruling the world $$ Dec 06, 2012
  • Paris Faces Darkness as City Set for Illumination Ban French politicians r the worst enemies France has $$ #inthedark Dec 05, 2012
  • Paulson Said to Blame Bet Against Europe4 Most of Loss Betting on disaster is tough; getting timing right tougher $$ Dec 05, 2012
  • Merkel’s euro push leaves E. Germany out in the cold Angela faces weakness in E. Germany politically & economically $$ Dec 03, 2012
  • France Sexy No More for Entrepreneurs Escaping Hollande The “invisible foot” opposes increasing taxes in France $$ Dec 03, 2012


Central Banking


  • Fed Exit Plan May Be Redrawn as Assets Near $3 Trillion The Fed will never significantly shrink its balance sheet $$ Dec 07, 2012
  • Bernanke Cliff Analogy Overstates Immediate Economic Harm After the cliff, 2014 will be a good year, &2015 better $$ Dec 07, 2012
  • At Press Conference After ECB Interest Rate Decision, Draghi Faces Frustrations & Mistrust No magic, only illusions $$ Dec 07, 2012
  • How canceling central banks’ holdings of government debt could be a useful thing I don’t agree, but worth reading $$ Dec 06, 2012
  • Fed holds lenders’ feet to the fire on mortgages Simple: absence of competition w/the lack of shadow banking $$ Dec 04, 2012


US Politics


  • Fannie and Freddie Are Not Piggy Banks Tosh, Congress loves a slush fund, Fed’l Financing Bank, FHA, Ag credit sys $$ Dec 07, 2012
  • Obama’s Tax Increases Will Find the Middle Class @cabaum1 After all, that is where most of the income 2 tax is $$ Dec 07, 2012
  • Push to Curb Union Power Advances in Michigan No one should be forced to join a union, or pay dues 2 get any job $$ Dec 07, 2012
  • The Real Reason Warren Buffett Should Pay More Taxes Labor & Capital should b taxed @ same rate, w/no deferral $$ Dec 07, 2012
  • Obama’s Tax Plan Would Spare Many Affluent Families Why the definition of income is more important than tax rates $$ Dec 07, 2012
  • Defense Industry Cuts Exceed 500,000 Workers Over Cliff Living on the DC side of Baltimore, the effect will be big $$ Dec 06, 2012
  • Greenspan Says Painless Solution to US Debt is Fantasy This is one of the two times per day for this stopped clock $$ Dec 06, 2012
  • Medicare is unsustainable in current form “As it stands now, Medicare cannot keep its promises 2future seniors” $$ Dec 06, 2012
  • Deck the Halls with Macro Follies A new video from the guy who brought you Keynes vs. Hayek at $$ Dec 06, 2012
  • Sallie Krawcheck should not run the SEC Her prior career does not suggest that she would be a good regulator $$ Dec 05, 2012
  • Elizabeth Warren would bring real smarts to the position. Now if we can find spots for Barofsky and Kauffman. Dec 05, 2012
  • Wrong: Five States 2Increase Class Time in Some Schools Little correlation btw class time & educational progress $$ Dec 04, 2012
  • Republicans Reprise 2011 Debt-Limit Threat in Cliff Talks This is not a 2-player game but a 3-player game: t-party $$ Dec 03, 2012
  • Obama Bets Re-Election Gave Him Power to Win Fiscal Cliff Think this idea is overplayed; players same now as b4 $$ Dec 03, 2012
  • +1 We need genuine capitalists, & not defenders of Wall Street & big business @ the SEC $$ @davidgaffen @footnoted @nminow @Reuters Dec 03, 2012




  • Benefits Leader Reins In 401(k)s $IBM defers 401(k) match 2 yearend; if u leave early, except retiring, u lose $$ Dec 07, 2012
  • Baby boomers need annuity simplicity SPIAs r good annuities don’t sell b/c agents never earn another commission $$ Dec 06, 2012
  • Milwaukee task force studies changes to pension system Will raise retirement ages & lower the multipliers 4 svc yrs $$ Dec 03, 2012
  • Officials call pension reforms a must Kentucky reduces future pension benefits; good 4 taxpayers, bad 4 employees $$ Dec 03, 2012




  • #FF @Fullcarry @KidDynamiteBlog @Convertbond @foxjust @EconOfContempt @GregorMacdonald @edwardnh @MatthewPhillips @srussolillo $$ Dec 08, 2012
  • To Quote Thomas Jefferson, ‘I Never Actually Said That’ Yogi Berra, “I never said most of the things I said.” $$ Dec 07, 2012
  • Big Test at Johns Hopkins (biz school) Scuttlebutt is that it is not doing so well w/their Int’l student focus $$ Dec 06, 2012
  • “[Ransomware] is the new Nigerian email scam,” Mr Haley said. “We’ll be talking about this for the next two years.” $$ Dec 06, 2012
  • The Insourcing Boom Can improve labor costs, morale, R&D, product quality, time to market. Wave of the future $$ Dec 06, 2012
  • My week on twitter: 42 retweets received, 3 new listings, 26 new followers, 65 mentions. Via: Dec 06, 2012
  • Dial-a-maid, get-a-slave in middle class India No, slavery is not dead yet & women bear the brunt of it $$ Dec 05, 2012
  • Hospital Incentives Help Babies Determine Own Birth Dates Washington State finds a way 2reduce caesarean-sections $$ Dec 05, 2012
  • While at RealMoney, Steve Smith & I tried 2 get Lenny Dykstra 2 explain the risks of his strategies; he never responded Dec 05, 2012
  • Deere Gets the Wright Stuff My friend Bill Wright is now making standing lawn mowers 4 $DE ; both firms benefit $$ Dec 04, 2012
  • Warren’s Way I respect Buffett a lot, but he is a hypocrite on taxes. Pay off the DTL, Sell $BRK shares, pay a div $$ Dec 05, 2012
  • Online Classes Mean No Dorm, Gym or Debt My wife thinks there is room 4a quality college w/o the frills $$ #worthatry Dec 03, 2012
  • Not news: Burying the “Fed model” Have 2 decompose in2 real rates & inflation expectations. Result known since 1994 $$ Dec 03, 2012
  • Wall Street finds a foreign detour around U.S. derivatives rules Do foreign biz through their London subs $$ Dec 03, 2012
  • A Free-Market Fix for the Copyright Racket Keep copyright protections, but limit them to 28 years $$ Dec 03, 2012


Fixed Income


  • Despite Risks, Investors Just Can’t Quit US Treasurys [sic] One of the better deflation hedges out there $$ Dec 04, 2012
  • Talking Macro, Fixed Income, & the Strategic Alpha Bond Fund w/Loomis Sayles’ Matt Eagan w/ @DavidSchawel Well done $$ Dec 07, 2012
  • California moves toward open source ratings for city bonds Researcher makes case here: $$ Dec 06, 2012
  • Yield-Starved Investors Hoarding EM Bonds There is yield & their govts r running finances more orthodox way $$ Dec 06, 2012
  • We Were Stunned By The Brand New Patent That’s Been Awarded To Bill Gross Easy ideas should not be patentable $$ Dec 06, 2012
  • Women analysts dominate muniland Funny, but when I was a corporate bond mgr, most of my analysts were bright ladies $$ Dec 06, 2012
  • BlackRock’s new bond plan $BLK does a kind of structuring of covenants (buyer’s due diligence) & coinvests in volume $$ Dec 05, 2012
  • Scrounging for Income Okay advice, but if you can reduce need 4 income or harvest capital gains would b better $$ Dec 03, 2012
  • Leveraged loans return 0.31% in November; YTD return is 8.8% Interesting part of article is strength of CLO bid $$ Dec 03, 2012
  • The Great Yield Gamble When risk-free rate is being used as a policy tool, it is harder 2 make rational choices $$ Dec 03, 2012
  • Panasonic Swings Ruin Funds’ Appetite for BBB Debt No notes rated <BBB+ by Japanese assessors offered in November $$ Dec 03, 2012
  • High Yield Exhaustion High yield feels tired between high supply, and potentially weakening demand $$ Dec 03, 2012

Rest of the World


  • China listings may soon flee US, expert says I usually don’t like when foreign listings leave; exception: China $$ Dec 06, 2012
  • Sellers in Toronto, Vancouver just say no as housing markets sink Feels like the US in late 2006 $$ Dec 06, 2012
  • Russia’s problem is not a petrified Soviet economics but corrupt politics impeding growth w/o fully blocking it $$ Dec 05, 2012
  • Top US Firms Are Cash-Rich Abroad, Cash-Poor at Home Buy foreign businesses & hire clever transfer pricing accts $$ Dec 04, 2012
  • Are We Watching Another North American Financial Crisis Unfold? Canadian taxpayers r on the hook for >C$1T in mtges $$ Dec 04, 2012
  • Shangai broken dreams – changing gear? Argues Chinese mkt has broken support, but might have value 2 locals that dig $$ Dec 03, 2012




  • Cook Says Lives Enriched Matters More Than Money Made Summary & Manufacturing Macs in US $$ Dec 06, 2012
  • Apple’s Halo Cracked $AAPL ‘s valuation requires that their products remain competitive for a long time to come $$ Dec 06, 2012
  • Banks book record profits off Fannie and Freddie It’s more that much origination capacity is gone -> wide spreads $$ Dec 06, 2012
  • Freeport to Buy Plains, McMoRan for $9 Billion I prefer resource extraction firms to be focused, not diversified $$ Dec 05, 2012
  • Steak Price Rising as Cattle Seen 20% Higher at JBS Combination of loose $$ policy & high feed prices from weather Dec 05, 2012
  • That fiscal cliff? $DOW Chemical says China’s a bigger worry Not a good sign for commodity chemical producers $$ Dec 04, 2012
  • Trucks — Boats – Planes – Trains Transports are hinting at more economic weakness $$ Dec 04, 2012
  • Diamonds Dug in Gusty Arctic Too Remote for Diesel Fuel How mining companies generate power in remote areas $$ #wow Dec 03, 2012




  • Insurers’ Sandy Claims Estimates Show No Long-Term Damage Prudent insurance underwriters & investors bounce back $$ Dec 06, 2012
  • Re: Principles based stat reserving. As a life actuary, I wonder what will happen to old blocks of biz that get reinsured 2 get new acctg $$ Dec 03, 2012
  • Insurers Add Reserve Power Move 2 principles-based reserving 4 Stat acctg is a mistake; lower margin of safety $$ Dec 03, 2012




  • Kind of fitting that $UBS discovered it $$ RT @graemehein: Swiss counter-intel is making Canada look good! Dec 04, 2012
  • OTOH, many other schools r athletic progs glued2 educ charity $$ RT @carney: Is Harvard really just a giant hedge fund? Dec 07, 2012
  • I believe it has a small educational charity attached $$ RT @carney: Is Harvard really just a giant hedge fund? Dec 07, 2012
  • I think Andrea encourages him to get fresh air now & then $$ RT @ecchymosis2009: Who let him out of his crypt? Dec 06, 2012
  • Barofsky 4 SEC Chair RT @matthewstoller: Important statements from @neilbarofsky on how to reform the SEC. $$ Dec 06, 2012
  • +1 Good news $$ RT @cate_long: .@matthewstoller reporting that Sallie Krawcheck seems to have been knocked out of the running as head of SEC Dec 06, 2012
  • Probably correct $$ RT @munilass: CalPERS likely 2 lose next court battle, San Bernardino bankruptcy observers predict Dec 05, 2012
  • You got it RT @James_Karn: @AlephBlog Don’t forget ethanol policy as a factor in high feed prices. Dec 05, 2012
  • UN = Useless Nations $$ RT @marykissel: Debacle-in-the-making: @UN takes a step toward regulating the #Internet Dec 05, 2012
  • +1 true $$ RT @LorcanRK: congrats to whoever is running the @euromoney account these days. Has completely transformed a semi-dormant feed. Dec 04, 2012
  • RT @ritholtz: ENOUGH ALREADY! I propose the hashmark #CLIFFHYPE to mark conversations about the excess hype regarding the so called Fis … Dec 04, 2012
  • Incongruous, huh? Or maybe it takes a thief… $$ RT @felixsalmon: Bob Merton on a financial stability committee??? Dec 03, 2012
  • Yes, & I lost some $$ on it last year RT @GaelicTorus: @AlephBlog panasonic is a value trap, imo $PC Dec 03, 2012
  • +1 For sure RT @footnoted: @joshuademasi @AlephBlog Well, nobody would accuse me of being a defender. That’s for sure. Dec 03, 2012
  • +1 RT @neilbarofsky: The more things change…Good for @benlawsky for voting no: New Rules for Life Insurers $$ Dec 03, 2012
  • Had good ideas in 2001 now jumps shark $$ RT @LDrogen: Taleb should have quit while he was ahead, this is just nonsense Dec 02, 2012




  • @Ryknow16 Not yet.. I expect the Fed to overdo it until it is obvious that they have to shift & then some; when shift comes it will b brutal Dec 08, 2012
  • “Thanks for writing this… this will be an important signal when the Fed finally hints at tightening,” David_Merkel $$ Dec 08, 2012
  • @DividendMaster Granted, but I have a rule of thumb: Removal of policy accommodation always is tougher than the Fed claims & imagines $$ Dec 07, 2012
  • @DavidSchawel You are welcome. Excellent interview & ideas. I also follow Pettis & Lacy Hunt — I’m an information hound $$ Dec 07, 2012
  • @EddyElfenbein It was a good indicator, but now it is used for policy purposes in Operation Twist, making it useless as an indicator now. $$ Dec 07, 2012
  • “Challenge for Apple is perpetuating successful innovation. Difficult to continually get high ROEs…” — David_Merkel $$ Dec 06, 2012
  • @neilbarofsky I have a compromise proposal on MMFs that gives everyone 90% of what they want. Can I show it to you? Dec 07, 2012
  • @DoubleDeuce Women I was speaking of were investment analysts, not actuaries, but u r right there also; famale actuaries tend 2b junior $$ Dec 06, 2012
  • @USTreasury Don’t care if this came from McConnell or Paul Krugman. The executive is *not* supposed to have any power over spending. Dumb $$ Dec 06, 2012
  • @DoubleDeuce Yo, friend. Men tend to be better at the risk-return tradeoff. Women tend to be better at estimating risk. Dec 06, 2012
  • @ivorroy I won’t live longer; eating meat in moderation is good 4u, &enjoying your life prolongs life far more than avoiding a few toxins $$ Dec 05, 2012
  • @Dan_Dicker Wrote a piece similar 2your “Embrace the Cliff” last June. “Might not be so Bad” $$ Dec 05, 2012
  • @cate_long I have a compromise proposal b4 the SEC on MMFs. Talked w/senior lawyers there: Really tough 2do good $$ Dec 05, 2012
  • @cate_long Personally, I think running the SEC is beyond everyone. The $$, the politics, can’t easily fire/hire people, etc. Dec 05, 2012
  • @cate_long Only be Chairman of the SEC. Only difficulties r managing the politics & incompetence. I would be willing 2 help. Dec 05, 2012
  • @rszbt Maybe we should nominate Cate Long. never reada bad article from her. Dec 05, 2012
  • @CondorOptions Ted Kauffman, Sheila Bair, Neil Barofsky, (giggle) Harry Markopolous, David Merkel (who?), Jack Ciesielski, I have more $$ Dec 05, 2012
  • @nelson3748 I expect nonsense from academics. Dec 05, 2012
  • @nelson3748 How has she been a disaster for consumer banking, and local and regional banks? Many of her proposal seem reasonable. Dec 05, 2012
  • @AppFlyer Yes, I heard about that… thought it was more dumb than lying… it was lying, but I didn’t see how she would gain from it. Dec 05, 2012
  • @AppFlyer Maybe I’m out of it. How is she a liar & a cheat? Links welcome. Dec 05, 2012
  • ‘ @StockRealist Hello from another member of the penny stock truth squad. Article of mine: Got $IMNG today #spitspit $$ Dec 04, 2012
  • .@drVTC It’s more what u do w/whatever time u spend w/kids, than the amount of time. I agree, tho; character is the most important factor $$ Dec 04, 2012
  • @paulvieira Typically u hear a few pops b4 the tree falls; inn the US that was mid-2007 $$ Dec 04, 2012
  • @EddyElfenbein Makes sense, thanks Dec 04, 2012
  • @buzzfeedben What r u looking for from someone to run your possible business vertical? I know of a lot of talent in financial writing… Dec 04, 2012
  • @EddyElfenbein your latest piece deals w/correlations — how well do the betas match up? Dec 04, 2012
  • @Fechtmeyer Thanks, I get it now. But technology is creative destruction, while Wall Street’s risk control methods were just wrong. $$ Dec 03, 2012
  • @Fechtmeyer SV? WS? Dec 03, 2012
  • @LDrogen “They that can give up essential liberty to obtain a little temporary safety deserve neither safety nor liberty.” Ben Franklin $$ Dec 02, 2012
  • @kyles09 That is, how much profit there is in the deal 4 the originator, whether in % upfront, or in the excess interest strip Dec 02, 2012