New York, June 20, 2012—Columbia Law School Professor Jeffrey N. Gordon, a noted expert in the field of corporate law and the regulatory state, has submitted written testimony to the Senate Banking Committee in connection with its Thursday, June 21, hearing about reforms to the $2.6 trillion money-market mutual-fund industry.
In his testimony to the Senate Banking Committee, Gordon—who has studied problems with money market mutual funds closely for the past four years—elaborates on three of his key observations about the state about the industry:
Money Market Mutual Funds (“MMFs”) are like banks except they have no provision for bearing loss and internalize none of the systemic risk costs of their activities.
MMFs present a unique “two-sided” run problem that makes them an unstable source of credit. Since most MMF credit it now extended to banks, this makes MMFs a significant vector for financial crisis.
These problems can be addressed through requiring MMF investors to acquire bundles of Class A/Class B shares, in which fixed NAV is preserved for the Class A shares.
Gordon, the Richard Paul Richman Professor of Law and co-director of the Law School’s Center for Law and Economics Studies, is out of the country and will not be in attendance at Thursday’s hearing, titled “Perspectives on Money Market Mutual Fund Reforms.”
Witnesses scheduled to testify in person include Mary Schapiro, the chairman U.S. Securities and Exchange Commission who has pushed for greater oversight of money market mutual funds in order to shore up the industry; Maryland State Treasurer Nancy Kopp; Paul Schott Stevens, president of the Investment Company Institute; J. Christopher Donahue, president, CEO, and director of Federated Investors; Bradley S. Fox, vice president and treasurer of Safeway; and Professor David S. Scharfstein of Harvard Business School.
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