NEW YORK (
) -- As
Securities and Exchange Commission
head, Mary Schapiro couldn't fix the $2.7 trillion money market system. Now she'll be joining it.
Schapiro will become a member of
Board of Directors as an independent director. Her nomination stands out as an ironic end to the former regulator's quest to reform money market funds -- a crucial if little followed cog in the U.S. financial system.
Money market funds buy short-term debt such as commercial paper from highly rated companies like General Electric, in an effort to return a yield slightly beyond the savings rate.
Instead of successfully enacting provisions that could help money markets withstand a credit crunch, Schapiro is becoming a director for an industrial conglomerate that was nearly felled in a 2008 money market freeze by its financial services arm,
A cynical take on the newest spin in the revolving door between Washington regulatory circles and Wall Street might be that Schapiro's role at GE is a buffer for the company in the event of another money market freeze, given a lack of prudential post-crisis reform.
GE, as it turns out, had the most on the line when the system nearly collapsed in 2008 and put corporations that relied on overnight funding, such as commercial paper, into a state of crisis.
Money markets seized up with the failure of investment bank
in September of 2008. After Lehman collapsed, a major money market fund, the
Primary Reserve Fund
, wrote down the value of its Lehman holdings to zero causing its assets fall to less than $1.00 a share in value, meaning it had "broken the buck."
Investors quickly fled money market funds putting major players in short-term debt markets, including banks and asset managers such as
, in retreat. The withdrawals put issuers relying on short-term debt markets, such as GE,
and even corporations as ordinary as
, into a severe cash crunch.
To stem the seizure of the market, Henry Paulson -- Treasury Secretary at the time -- guaranteed the entire $3 trillion money market system, risking taxpayer funds to reverse the historic flight of capital.
In response to the market freeze, GE got a life-saving $3 billion investment from Warren Buffett of
, and its financing arm
received far more support by converting to a bank holding company and receiving a $139 billion Federal Deposit Insurance Corp.-debt backstop. GE Capital also raised over $16 billion in financing under the Federal Reserve's Commercial Paper Funding Facility.
That's where Mary Schapiro comes in.
As SEC chair from 2009 through December 2012, Schapiro was the most prominent supporter of reforms to the U.S. money market industry.
Given the Treasury guarantee, the FDIC's involvement and even the Federal Reserve's intervention in the market, Schapiro lobbied for reforms to strengthen investor confidence in money markets and make them better prepared for a cash crunch.
Specifically, Schapiro proposed money market funds float their net-asset-values and use mark-to-market valuations so as to give investors a clearer picture of their financial health.
A floating NAV and mark-to-market accounting might also better prepare investors for potential rough patches, given the surprise that the Primary Reserve Fund's collapse had on markets.
Schapiro also proposed money market funds hold a small 1% capital reserve to cushion against potential losses on their short-term debt holdings.
Near the end of Schapiro's tenure at the SEC, her reform proposals were not taken up by
. When resigning from the regulatory agency in December, money market reform stood out as one of Schapiro's biggest unfulfilled policies.
We must be cognizant that the tools that were used to stop the run on money market funds in 2008 no longer exist," Schapiro said in an August statement when her reform proposals failed to gain the support needed to become policy.
There is no 'back-up plan' in place if we experience another run on money market funds, because money market funds effectively are operating without a net."
It might not come as a surprise, then, that GE is taking Schapiro in-house.
In the event of another financial crisis, Schapiro might be useful in helping GE and its financing arm through a seizure of the unreformed money market industry.
A GE spokesperson, Seth Martin, wouldn't comment on Schapiro's work on money market reform or how it relates to her nomination as an independent director to the company's board.
Still, Martin characterized Schapiro's experience dealing with post-crisis financial market fixes in terms of the value it would bring to GE's investors. "It is a good thing for GE and a good thing for GE shareholders," he said.
Schapiro's close ties to the money market industry may prove to be one of the most relevant issues for GE.
The company borrowed an average of roughly $50 billion in commercial paper in the fourth quarter of 2012, according to the company's annual
. At a 2007 peak, GE's commercial paper borrowings stood at roughly double current levels.
"Mary Schapiro will bring valuable expertise to GE, particularly with her experience overseeing U.S. financial markets," Jeff Immelt, chairman and CEO of GE said Monday in statement. "Her understanding of corporate governance and financial regulation will be of great benefit to GE and its shareowners."
GE has spent post-crisis years selling assets and building up long-term funding for the company's industrial and financial operations. Those moves allowed the company to exit the FDIC's Temporary Liquidity Guarantee Program, repay the funds it received from the Fed and redeem Buffett's costly $3 billion in preferred shares.
With improved liquidity, GE has even seen its financing arm again become a crucial piece of the company's overall dividend policy. GE Capital dividends still hinge on Federal Reserve approval, given the unit's status as a bank holding company.
The prospect of money market reform, meanwhile, remains alive. The U.S. Financial Stability Oversight Council is examining whether it will recommend that the SEC revisit Schapiro's proposals. SEC commissioner Luis Aguilar, a key blocking vote against an attempt at money market reform, has indicated he's willing to revisit issues such as floating net asset values for funds.
Were any reforms to be enacted, Shapiro could be helpful to GE in preparing for regulation she spearheaded.
Still, in spite of the work GE's done to extricate itself from flighty short-term funding markets, Schapiro's appointment to GE's board might shed light on her lack of success at reform and the still fragile position of the overall money market.
John Nester, a SEC spokesperson declined to comment for this story.
-- Written by Antoine Gara in New York