Congress Likely to Probe Money Market Funds Over Greek Exposure

A Congressional hearing on the mutual fund industry this week will likely put money market funds under scrutiny for any holdings of Greek debt and other euro zone investments.

The House Financial Services Committee announced June 3 that its capital markets subcommittee would conduct a standard oversight hearing of the industry this Friday.

But the faltering $160 billion Greek financial bailout, launched last year by the European Union and the International Monetary Fund, now threatens to put the industry on the defensive at the hearing -- especially its $2.7 trillion in money market funds, which are supposed to invest mainly in the safest short-term debt securities to protect customers' cash.

Shares in money market funds have historically traded at $1 in "net asset value" and have rarely "broken the buck" because of financial market disruptions or bad investments.

But two weeks ago, a top Federal Reserve official warned that U.S. money funds might be vulnerable to "unexpected international financial problems" emanating from Europe.

"Consider that many (but not all) MMMF' s (money market mutual funds) have sizeable exposures to European bank by virtue of holding the banks' short-term debt," Eric Rosengren, president of the Federal Reserve Bank of Boston, told a conference. "This means some MMMFs are potentially sensitive to a disruption in the European banking system, should one arise from the fiscal and sovereign- debt problems we are seeing in some European countries."

The mutual fund industry and fund analysts have pushed back on arguments that money market investors are at greater risk with the unfolding events in Greece and EU countries. European finance ministers met Sunday to consider next steps in the Greek bailout, which is expected to require a restructuring and additional cash.

"Money market funds do have exposure to European banks, including certain French banks, that have investments in Greece," said a spokesperson for the fund industry's trade association, the Investment Company Institute.

But she noted that while one credit rating company,  Moody's Investor Service, put the long-term debt of three big French banks on review for possible downgrades last week because of their holdings of Greek bonds, Moody's reaffirmed its ratings on the banks' short-term debt.

"The Eurozone has been experiencing debt and financial concerns for more than a year now," the ICI spokesperson said. "Throughout this period, prime money market funds and other investors have reacted to changing developments. As fiduciaries to their shareholders, money market funds are constantly examining the quality of their portfolio and the creditworthiness of investmentsgoing above and beyond any credit rating agency ratings. Over time, this analysis has led prime money market funds to reduce their exposure to certain European sectors and names."

Real-time data on money fund holdings are hard to come by, though the Securities and Exchange Commission now requires funds to report them monthly. But one mutual fund investor advocate said he believes customers dont have to worry much about Greek and European debt problems in money funds.

My best guess would be that you will see almost no exposure to Greek debt in money market funds today, said Mercer Bullard of Fund Democracy. I would bet that they have very little exposure to French banks that may be overexposed to Greek debt.

In 2008, at the height of the financial crisis, the share price of one major money market fund, the Reserve Fund, fell below $1 because of the fund's short-term debt holdings in the investment bank Lehman Brothers, which filed for bankruptcy that fall. As part of their response to the crisis, financial regulators have beefed up their oversight of money funds.

Witnesses scheduled to testify at Friday's hearing include executives from two of the nation's biggest mutual fund companies, Fidelity and Vanguard, and the ICI, as well as a former official with the Securities and Exchange Commission and other experts, a House source said.

The hearing "has been in the works for a while" and was not scheduled because of developments in Europe, the source said. He said committee members have no specific agenda for the session or any legislation in mind from it.

But he acknowledged the Greek debt problems would likely draw questions about the fund industry's money market policies, practices and holdings, as well as regulators' oversight of them.

"If it's a question of better disclosure--that (a money market fund) is not savings account, a bank account (guaranteed by the U.S. government), we need to tease that out of the hearing," he added.