Money Market Funds and Their Allies Resist New Rules Here's a clever idea. Let's start a bank. It will take deposits, promising to pay them back on demand. It will use the money to make short-term loans to borrowers it thinks are safe. If too many depositors want their money back quickly, it will sell the loans to somebody else, for face value. Our bank will not keep reserves on hand to deal with what would happen if any of our borrowers failed to repay their loans. Keeping such reserves, you see, would be far too costly, and reduce the rates we could pay to our depositors. Nor would we be willing to tell our depositors that they might not have instant access to their funds. That might scare the depositors away. We won't pay fees for deposit insurance, but we hope our customers will assume that the government will protect them anyway if we fail. That whole idea sounds crazy, but in fact we already have such banks. They are called money market funds, and they have $2.5 trillion in assets. Mary Schapiro, the chairwoman of the Securities and Exchange Commission, is trying to impose some regulations to treat such funds a little more like banks, but that is being fought bitterly by the fund companies and by the U.S. Chamber of Commerce, which has established a Web site and blanketed the Washington subway station nearest the S.E.C. offices with ads denouncing such rules as outrageous. The S.E.C. is expected to seek comment soon on possible new rules, but it is far from clear that Ms. Schapiro can prevail. Three of the other four commissioners have voiced sympathy for the money market fund industry. She would need at least three votes, including her own, to pass a rule. If the S.E.C. does act, there will be efforts to get Congress or the courts to overrule it. The very existence of the money market fund industry is a tribute to foolish regulation decades ago, when banks were prohibited from offering competitive rates on savings accounts. Now, with rates very low, it is almost impossible to make money running a money market fund, but the fund groups want to stay in the business because they do not want to lose customers to real banks or to other mutual fund companies. Currently, money market funds - unlike all other mutual funds - try to appear to be risk-free. The funds have net asset values per share of exactly $1, and "breaking the buck" is widely feared. The S.E.C. rules allow the funds to maintain that dollar value so long as the real value is at least 99.5 cents. But of course the reality is that money market funds do sometimes lose money on securities they buy. The buck is broken far more often than fund investors realize - or it would be if fund sponsors did not step up and take the losses themselves. In Senate testimony this month, Ms. Schapiro said the commission had counted 300 cases in which the fund sponsors bailed out their funds over the years. In 2008, the sponsor of the Reserve Primary Fund, which owned Lehman Brothers securities, could not afford to do that. The fund broke the buck and caused a run on all money market funds, even ones that invested only in Treasury securities. The government stepped in to guarantee all money market funds. "Unless money market fund regulation is reformed," Ms. Schapiro testified, "taxpayers and markets will continue to be at risk that a money market fund can break the buck and transform a moderate financial shock into a destabilizing run. In such a scenario, policy makers would again be left with two unacceptable choices: a bailout or a crisis. Implicitly, the fund industry wants us to assume that the government would choose the former. Ms. Schapiro has suggested a few possibilities. One would be to adopt variable pricing of fund shares, so that if the real value was 99.51 cents, that is what you would get from redeeming the shares. As it is, she pointed out, a fast-moving institutional investor that senses trouble can shift the losses onto other investors. If a fund's real net asset value is 99.74 cents, and large investors redeem half the shares for $1, the net asset value of the remaining shares will fall below 99.5 cents. To the industry, variable pricing is anathema. The institutional investors that treat money market fund shares as cash would be forced to change accounting systems, at great expense. Retail investors would flee once they realized that losses were possible. Another approach, she testified, would be to force the funds to hold reserves against such a loss. So the real net asset value of a fund listed at $1 would have to be a little higher than that, with the sponsor putting in the extra money either from its own funds or through reducing the payouts to customers. In that case, a fleeing investor, taking the $1 per share, would be strengthening the fund for the remaining customers. Or funds could be required to put in restrictions on large withdrawals, making it harder for a well-informed investor to get out when trouble comes and leave the losses to the others. Any such rules, protests the U.S. Chamber of Commerce Web site, "would fundamentally change the quality and characteristics of money market funds," causing both individual and corporate investors to flee.