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Lawmakers Worry About U.S. Money Market Funds' Exposure to European Debt

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Government
By Peter Barnes
Fox Business

The chairman of the House subcommittee that oversees the mutual fund industry said Thursday he was "taken aback" when he learned of the high levels of short-term debt of European banks held by U.S. money market funds--more $900 billion--and plans to "drill down" into the issue at an oversight hearing Friday to probe whether investors are safe from the debt problems shaking Greece and some of its neighbors.

But Rep. Scott Garrett (R-NJ) indicated he plans to allow the funds' principal regulator, the Securities and Exchange Commission, to proceed with additional investor protections before he considers any new legislation to supervise money funds.

"If there's need for action, Congress certainly can take it," Garrett said. "If not, we can see what the regulators are doing next. Congress can also weigh in with the regulators, as we often do…we can weigh in, make suggestions or encouragement there as well."

So-called "prime" money market funds, which typically invest in safer short-term debt securities, hold nearly $936 billion in such instruments issued by European banks, according to data supplied by the industry to the SEC--about half of prime funds' $1.8 trillion in assets.

"I was somewhat taken aback--it was a higher number than I would have anticipated," Garrett said in an interview with FOX Business. "I would have anticipated it being someplace else around the globe, and I would have thought (that the funds invested) a little more heavily here in the U.S."

The funds' holdings have drawn scrutiny from U.S. regulators and lawmakers because European banks own hundreds of billions of dollars of government notes and bonds issued by Greece, Portugal, Italy and Spain, which are in danger of defaulting due to their high debt levels. The European Union and International Monetary Fund have already launched bailouts of Greece and Portugal.

Fund managers -- and U.S. regulators -- fear Europe's financial problems could spook American investors, triggering "runs" on money funds as customers rush to redeem shares, risking destabilizing the wider financial system.

A major concern is that cash crunches caused by rapid redemptions could cause a firm's shares to "break the buck." Money funds historically have been valued at $1 a share at all times, reflecting their positions as safe, stable havens for cash in turbulent investment environments.

But at the height of the financial crisis in 2008, the shares of one major money market fund, the Reserve Fund, fell below $1 because of its short-term debt holdings in Lehman Brothers, a major investment bank that filed for bankruptcy that fall. The event triggered a panic among money fund customers.

"If you believe everything is OK with regard to the (European) banks, if you believe that the EU (European Union) will somehow…solve the situation over there and banks will be protected, then there's no problem over here for the industry," Garrett said, "If you don't believe that everything is going to go just as they plan in the EU with regard to the banks, then of course that raises some concerns."

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Garrett's subcommittee will hear testimony Friday from executives with mutual fund giants Fidelity and Vanguard, as well as the president of the ICI, a former SEC official and two mutual fund experts.

The SEC, which Garrett did not ask to testify at the hearing, is currently considering additional regulations for money market funds, such as higher capital requirements. Last year, as part of its moves to improve regulation of investment firms in the wake of the financial crisis, the agency approved new disclosure and investment rules for money funds.

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