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Say goodbye to money market funds?

The Obama administration may soon set its sights on radical changes in money market funds.

From MarketWatch:

When the Group of Thirty issued its proposals [last month] for reforming the financial industry [few observers noted a proposal about money funds].

Tucked into three paragraphs amid an 82-page report [PDF] was a suggestion that money-market funds should either let their net asset values float freely or convert to "special-purpose banks" - steps that fund-industry representatives say would effectively kill money-market funds in their current form.

"If the recommendations are implemented, there will be no more money-market funds, period," said Paul Schott Stevens, president and chief executive of the Investment Company Institute, the fund industry's trade group.

How likely is it that the new administration will push for MMF changes? The chair of the Group of Thirty study group is former Fed chairman Paul Volcker, chairman of President Obama's Economic Recovery Advisory Board. (Other members of the G30, a Washington-based group of international financiers and academics, include Treasury Secretary Tim Geithner and Lawrence Summers, Mr. Obama's chief economic adviser.)

During an appearance this month before the Senate Banking Committee, Volcker echoed the G30 recommendation that MMFs should be regulated like banks. "If they're going to act like a bank and talk like a bank, they ought to be regulated like a bank," he said.

But pro-money-fund observers argue that Volcker is overreacting to the brief run on money funds that occurred last fall after the Reserve Primary Fund "broke the buck."

"[T]he Group of 30's recommendations represent an overreaction that would force the reintermediation of a $2 trillion dollar commercial paper market, protect banks from their primary source of competition, and deprive investors of the ability to obtain reasonable returns with a high degree of safety and liquidity," writes investment attorney Steven Keen in Financial Week.

If you're invested in a money market fund, stay tuned.

UPDATE: The Wall Street Journal reports that MMF assets are "close to hitting a record $4 trillion." The story explains how MMFs, with some undergirding from the Treasury Department, have bounced back from the run of last September. Reporter Shefali Anand also touches on Mr. Volcker's idea of regulating money funds as banks.

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