Shooting at Money Market Funds

Banks and S and Ls attack a popular rival

Money market funds have become a highflyer for savers. Like a bank, a money fund takes in deposits and pays them out on demand. But unlike a commercial bank, which is limited by the Federal Reserve to paying 5¼% interest, money market funds face no restrictions on the return they pay investors. At times during 1980, some yielded close to 18%. An estimated 5 million new money market fund accounts have been opened in the past three years, and last week the funds' assets went over $100 billion. But now banks and savings and loans have launched drives to bring them down.

Money market funds, which are usually run by large investment firms, put their deposits in short-term (less than 60 days) financial instruments like Treasury bills, certificates of deposit and commercial paper. These usually safe, high-yielding investments are sold only in denominations of $10,000 and more and are out of the reach of the ordinary saver. The usual minimum deposit for money market funds, on the other hand, is $1,000. Investors can usually write checks against their deposits, much like a checking account, although many funds require a minimum withdrawal of $500.

Banks and savings institutions have undoubtedly been hurt by the money funds, since their cheapest source of funds is deposits in checking accounts and low-interest passbook accounts. Saddled with billions of dollars' worth of unprofitable old low-interest mortgages, some thrift institutions are tottering on the edge of bankruptcy. Last week the U.S. League of Savings Associations urged the Government to impose sharp restrictions on the money market funds and asked the Federal Savings and Loan Insurance Corporation to pledge up to $7 billion in low-cost loans. Says Carroll Melton, league economist: "The money market funds are undermining the mortgage-lending and banking systems."

Congress has begun to act on those complaints. Senate Banking Committee Chairman Jake Garn of Utah wants to prevent money market funds from offering check-writing privileges; Congressman James Leach of Iowa has introduced a bill that would diminish the funds' appeal by setting reserve requirements on them. The money market funds are regulated by the Securities and Exchange Commission, but they, unlike banks, are not obliged to leave up to 12% of their deposits with the Federal Reserve. Such a requirement would increase costs for money market funds and reduce the interest they could pay.

The funds are also under heavy assault in several state legislatures. In Oklahoma, two bills are under consideration: one would make the funds register with the state banking commissioner, and the other would make them include in their advertising the fact that money fund accounts are not federally insured, as are bank and savings and loan deposits. In Massachusetts, a proposal has been made that would require the money market funds to make investments wherever depositors live. That would be like asking General Motors to set up a factory in each shareholder's home town. In Utah last week, however, the funds won one battle when the state house of representatives voted down a bill that would have banned money market funds from providing check-writing privileges.