Michael McKee on Bloomberg Surveillance.

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.) MICHAEL MCKEE, BLOOMBERG NEWS, TALKS TO TOM KEENE ON BLOOMBERG SURVEILLANCE.

AUGUST 15, 2012

SPEAKERS: TOM KEENE, HOST, BLOOMBERG NEWS

MICHAEL MCKEE, BLOOMBERG NEWS

DAVID BLANCHFLOWER, PROFESSOR, DARTMOUTH COLLEGE

SARA EISEN, HOST, BLOOMBERG NEWS

07:29

TOM KEENE, HOST, BLOOMBERG NEWS: This is a smart op-ed, and we've got the right guy to talk about it. One of the doves, New York Federal Reserve's William Dudley, formerly with Goldman Sachs. He published in Bloomberg View this morning an idea of our money market funds, things we take for granted looking at regulation. What I'm looking at, Michael McKee, is the low interest rates on money market funds. How do they make money?

MICHAEL MCKEE, BLOOMBERG NEWS: They barely make money these days, but that's not the issue that they're worried about at the moment. You can get into monetary policy and how the Fed is affecting them. But what Dudley is doing, he's joining a very public Fed lobbying campaign. It's unusual to see the Fed this much out in public, particularly on an issue that doesn't directly follow under their responsibility. Eric Rosengren, the Boston Fed, talking about this as well. Dan Turillo from the board of governors. People take money funds for granted, as you say, believe they're safe. But they point out at the Fed and at the SEC that they are not safe, that they can go broke. We saw that -

KEENE: They can break the buck.

MCKEE: They can break the buck. They have a net asset value of $1. They can go below that. And then you can see a run on these funds.

KEENE: Key thing you said, Mike. Why are not they under Fed review?

MCKEE: Well it's not a - it's not a responsibility of the Fed under Dodd-Frank or any other legislation at this point.

DAVID BLANCHFLOWER, PROFESSOR, DARTMOUTH COLLEGE: Whose is it?

MCKEE: It is at the moment the SEC. Mary Schapiro, the SEC chairwoman, has a proposal to fix some of these problems. She wants to abandon the fixed net asset value of $1, require capital cushions and limit redemptions. There is not enough support on the SEC board for this proposal right now. The money market fund industry lobbying heavily against it. They're supposed to vote August 29. Now you have these Fed officials coming out and trying to push it over the line, helping (inaudible).

KEENE: And critically, Dr. Dudley supports Chairman Schapiro, right?

MCKEE: Dr. Dudley supports Chairman Schapiro, and he makes that very clear that this is a problem for the industry overall.

KEENE: Here's the problem for us. Let's bring it up right now. Bloomberg View. Runs on the bank, or a run on your money market fund. We're looking for that right now. Bloomberg View. Let's get that quote up here from Dudley. Runs in the wholesale funding markets are the equivalent of the depositor runs that plagued US banking 80 years ago. As with old- fashioned depositor runs, funding runs can have devastating consequences. I think that's beautifully put.

MCKEE: Yeah. He makes it clear that investors don't realize how quickly this could all fall apart. After the reserve primary fund, a Fed official told me they saw $500 billion in one day flowing out of these funds until the treasury stepped in a with a guarantee, which they can no longer do under the law.

KEENE: Why isn't this under the Federal Reserve screw (ph) the marketers in money market funds. We all use thee things every day. It's nonsensical to me that Chairman Bernanke's not watching this.

MCKEE: Well he is watching it, and that's why these people are on top of it. And if the SEC can't get it through, Fed officials have suggested that they will at least do what they can. They regulate banks, so they can regulate the banks that own funds, and they may force these funds under these new rules.

SARA EISEN, HOST, BLOOMBERG NEWS: In the long list of regulation, regulatory overhaul and rewriting the rules post-financial crisis, where does money market funds fit in?

MCKEE: Well it's a lot higher than people would think. It's not something that happens all the time, but the SEC says over 300 times fund sponsors have had to step in to save their funds, 21 times during the financial crisis.

KEENE: Ten seconds. Are any of my money market funds in European assets?

MCKEE: They probably are. They do spend a lot of money over there.

KEENE: They do. Again, I think they take it for granted they're international. They're not just located in the United States.

MCKEE: Right.

KEENE: Right. Michael McKee, thank you so much.

07:33

***END OF TRANSCRIPT***

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