Bernanke backs Moody's critic in debate over money fund ratings

Federal Reserve Chairman Ben S Bernanke said investor speculation over which money market mutual funds are likely to be bailed out by their parent companies during a crisis can undermine the stability of the industry that manages $2.79 trillion.

Bernanke, in a December 9 letter to Anthony J Carfang, partner in Chicago consulting firm Treasury Strategies, said market developments that reinforce speculation whether money funds may be bailed out are a “concern” and sponsor support should be addressed in the context of planned reforms of the industry.

Carfang in November criticised a proposal by Moody’s Corp that its ratings of money funds take into account the likelihood of a parent bailout in the event of losses. Bernanke, in the letter, encouraged Carfang to submit his views of the Moody’s proposal to the Securities and Exchange Commission (SEC).

“I think he’s saying he wants the word to get out, but he didn’t want to do it directly,” Carfang said today in an interview.

Barbara Hagenbaugh, a spokeswoman for the Federal Reserve, confirmed Bernanke sent the letter and declined to comment on it.

Money market funds have come under increased scrutiny by regulators since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, only the second such fund to expose investors to losses. Its closure sparked an industry wide run that helped freeze global credit markets.

The SEC this year enforced new rules that require money funds to boost holdings of cash and easy-to-sell securities, reduce their level of lower-rated debt and reveal more about what they own.

The President’s Working Group on Financial Markets, a White House advisory body of which Bernanke is a member, has examined additional proposed regulations and asked market participants to submit comments to the SEC.