Unintended Consequences

Business Lose a Significant Source of Funding:  Since money market funds purchase one-third of all corporate commercial paper, a shrinking money market fund industry would reduce the market for this vital type of financing.  While larger businesses will almost always secure bank financing because of their sheer size and creditworthiness, smaller companies that need capital the most will struggle to compete for bank financing.  In addition, bank lending does not have the capacity to replace the entire void that would be left by a defunct $1.1 trillion commercial paper market.

Higher Financing Costs:  With lower investor demand for corporate commercial paper, businesses will be forced to seek financing from banks or other lenders and face higher fees and interest rates.  These additional costs will place more pressure on businesses to cut expenses elsewhere, including expansion and hiring.  Such cuts will inevitably lead to a ripple effect in the American economy, endangering the already fragile economic recovery.  

Corporate Money Moves Out of Money Market Funds:  Given the complexity of accounting for a floating NAV and the cost of modifying existing systems to support it, corporations will flee money market funds if they no longer provide a stable NAV.  Moreover, certain companies have existing investment policies that prohibit the investment of excess cash in something without a stable NAV.

Capital Flees the United States and Moves to Unregulated Markets:  If the money market fund industry shrinks, the $2.5 trillion in funds will end up in offshore investment vehicles or other unregulated investment products.  Encouraging investors to migrate to less regulated investment vehicles is not, however, consistent with efforts to reduce risk, increase market transparency, and ensure greater market stability.  Forcing investors into narrower bands of financial products and institutions will only increase risk and weaken the stability of the financial markets.