It probably couldn't have lasted forever. Without the bother of any new federal regulations, the money market mutual funds have grown from zero to nearly $100 billion in assets in less than a decade. Some $25 billion of these assets have been added in this year alone.
In the future, this growth may have to be accomplished with a few new restrictions. However, such new regulations are not considered likely to curb the funds' growth or lower their yields enough to make them unattractive to savers looking for higher interest.
The burgeoning money funds are facing increased and concerted pressure from banks, savings and loans, mutual savings banks, a number of state legislatures and banking officials, and several members of Congress. These competitors and officials want to limit some them to put some of their assets in nonearning reserves, as was done for a few months last year.
At the time, money fund executives and observers point out, the 15 percent reserve requirement was totally ineffective in limiting growth of the funds, and did very little harm to their yields. Now, even if reserve requirements were to return and even if the funds were to lose other features, such as their check-writing privileges -- another restriction being contemplated in Congress -- most investors probably would not notice.
The funds invest in a number of short-term instruments, including $100,000 bank certificates, Treasury bills, and commercial paper. Reserve requirements would limit the amount of money the funds have to invest. So their yields might not be quite as high; but as long as overall money market rates stayed well above bank passbook interest, the funds would be able to top passbook rates, too.
Still, the funds' remarkable growth, and the profit squeeze faced by the banking industry in a high-interest environment have helped bring new pressure on the money funds. Banking executives and their allies around the country assert that the funds are growing by draining their reserves and making it harder for them -- particularly those heavily involved in mortgage lending -- to have money available for loans. In the new Congress, their cause is aided by the presence of an admitted champion of the small banks -- Sen. Jake Garn (R) of Utah.
In the next few weeks, Mr. garn, chairman of the Senate Committee on Banking, Housing, and Urban Affairs, will hold hearings on a range of banking and financial institution issues, including the money funds, according to an aide to Senator Garn. Mr. Garn has spoken out against the funds' check-writing privileges and has wondered aloud whether the funds should not be required to work with the same reserve requirements as the banks and savings institutions.
Some of Senator Garn's views were recently aired before the Legislature in his home state of Utah, where that body is considering a bill that would limit the check-writing privileges of the money funds. If passed, it would make Utah the first state to place such restrictions on money funds.
Check-writing restrictions and reserve requirements have also been considered in Oklahoma, Arkansas, and Massachusetts. Of these state only Oklahoma still has an active piece of legislation pending on the issue.
Another member of Congress, Rep. James Leach (R) of Iowa, has introduced a bill that would authorize the Federal Reserve Board to impose reserve requirements on the money funds.
"I'm a strong advocate of money market funds as a specific vehicle for small savers to invest in money market rates," Representative Leach asserted in an interview. "But we have a situation where one part of the financial industry is under one set of regulations and another part under another set of regulations."
One of his aims, Representative Leach says, is to give the banking industry a chance to hold on until they, too, can offer competitive market interest rates. Under provisions of a bill passed by Congress last year, interest rate ceilings for banks and savings institutions will be gradually lifted and finally removed in 1986.
"I happen to be completely alarmed, if not panicked, by the situation the S&Ls are in," Representative Leach said in explaining his feeling of urgency to do something to protect the banking industry, and particularly the savings and loans, from being harmed by the growth of the money funds.
But, argues Alfred Johnson, vice-president and chief economist at the mutual fund's trade organization, the Investment Company Institute, restricting the money funds will not only be of little help to the S&Ls: It could hurt them.
"If money funds are squeezed, this money would only go into high-cost money," Mr. Johnson said. He explained that nearly 90 percent of money fund assets are in accounts of $10,000 or more, and this money would only be sent out of money market funds into vehicles like six-month money market certificates sold by banks and S&Ls. While these certificates have increased the deposits of the banks, the interest rates they offer are rather high for many smaller institutions to bear. For these institutions, Mr. Johnson said, "They're attracting money but they're enjoying it less."
S&L executives might be able to enjoy their business more if they got a little help from federal regulators and Congress, a spokesman for the National Savings and Loan League said. Many S&Ls are carrying a heavy load of old mortgages, some with interest as low as 5 percent, he pointed out. Meanwhile their costs of money have escalated along with interest rates.
If accounting rules could be changed to allow the S&Ls to spread these losses over several years, or if the Federal Home Loan Bank Board could take over some of the cheaper loans and allow the S&Ls to pay them back gradually, their profit squeeze could be eased.