Credit crunch vs. money market: a newsletter debate
New York — The headlines in the Daily News are known as ''attention getters.'' Usually, however, the financial pages of the country's largest-circulation tabloid are relatively tame.
Not one day last month, however. The headline over a story by Dan Dorfman, a syndicated columnist, read: ''Credit crunch could sink the money-market funds.'' The article went on to report that one newsletter writer, Andrew Addison, thought the money market funds could get hurt later this year if a full-blown credit crunch developed.
William Donoghue, however, who writes a newsletter, Donoghue's Moneyletter, says there is more fantasy than fact in Mr. Addison's comments. ''The easiest way to get attention,'' Mr. Donoghue said in a telephone interview, ''is to criticize the money funds.''
Mr. Dorfman's column and the scare scenario of another newsletter writer, Julian Snyder, prompted Donoghue, in his latest publication, to write on the question ''Can Money Funds Survive a Credit Crunch?'' His reply, as one would expect from someone who has become known as the leading authority and proponent of the funds, was ''yes.''
Donoghue took issue with both Addison, who publishes his newsletter out of Quincy, Mass., and Mr. Snyder, who publishes a newsletter called International Moneyline, written out of New York. Donoghue maintains that neither writer makes a convincing case that the funds, now with assets of $169 billion, will get hurt in a credit crunch.
Here is how their arguments line up:
Addison: In a credit crunch some of the investments made by the money market funds could run into problems. The biggest risk, according to Addison, a former investment officer at Shawmut Bank, a Massachusetts commercial bank, would be in the commercial paper market or the Eurodollar markets. Commercial paper is the nonsecured obligation of a large commercial borrower, such as General Motors. Eurodollars are borrowings by US banks and corporations made in dollars outside the United States.
In the commercial paper market, Addison argues, the borrowers range the gamut of creditworthiness. Although these borrowers are rated by Standard & Poor's and Moody's, he says, ''Some of the funds do not limit themselves to the top rated A prime or Prime 1 companies. Besides, there is the risk the rating agencies won't catch the bankrupts in advance, such as happened with Penn Central.''
Addison adds, ''While I'm not predicting a calamity in the commercial paper market, I don't think most investors when they bought their money market fund adequately examined the purpose of the fund.''
Regarding the overseas markets, he argues that high interest rates in the US could bring huge inflows of foreign money across the seas to the US markets. This might cause a run on foreign banks and do some damage to money market funds with an exposure in Eurodollar or foreign bank certificates of deposit.
Donoghue: The money market funds have never run into problems during a credit crunch, even though the money markets have. Donoghue maintains that those companies that do not qualify for the top investment ratings simply will not get money in the commercial paper markets. ''By law, the fund must follow its investment criteria,'' he says, ''and in practice they are even tougher than what they have written in their prospectus.''
Furthermore, he says, the reason many of the funds feel comfortable in the commercial paper markets is that many of the corporations ''are in better shape than the banks.'' Corporations, he points out, fail slowly; banks fail quickly.
As for the overseas markets, Donoghue claims Addison is ''stretching the facts a lot.'' He believes the chances of a run on foreign banks by investors eager to park their funds in the US are negligible. ''We're talking about the largest banks in the world,'' he says, ''and to knock them is a 'cheap shot.' As for the foreign banks on US shores, they are regulated by the (Federal Reserve) just like the US banks.'' Investments in the overseas branches of US banks are made in foreign capitals, since the yields are higher because of Federal Reserve Board regulations in this country. Usually the loans are made to such banks as Citibank or Chase Manhattan Bank, which have excellent creditworthiness.
Snyder: If a large corporation defaulted on interest due on its commercial paper or a major bank failed, there could be a run on the money funds. In his newsletter Mr. Snyder writes, ''The industry has no reserve requirements. Its accounts are not insured. It's not under supervision of any kind. A 'run' on a money fund could easily provoke a money fund panic.'' In a phone interview, he also said the high proportion of commercial paper (36 percent) in the money funds scares him. With corporate liquidity generally low, he feels anxious about the lending of unsecured money to the corporate world. Should the commercial paper market dry up because of a bankruptcy, he says, the money market funds could get hurt.
Donoghue: The money market funds are highly regulated and supervised by the Securities and Exchange Commission. Furthermore, Donoghue notes, reserves are used for monetary control. And many of the securities money funds buy are similar to those some banks use for their reserves. As for insurance on the funds, Donoghue replies that only bank deposits require insurance; money funds are investments and as such don't require insurance. And if the funds invest only in the highest-quality commercial paper, there shouldn't be any risks.