Putting a Price on 'Too Big To Fail': Street Whispers

NEW YORK ( TheStreet) -- Money market funds have come a lot closer to losing their implicit government guarantee in recent days, so the fact that shares of Federated Investors ( FII) have lost just about 2% since the latest news broke is a bit surprising.

The latest news refers to the apparent softening stance of Luis Aguilar, a Democratic Commissioner at Securities and Exchange Commission and former general counsel at fund giant Invesco Ltd. ( IVZ) who in August cast the decisive swing vote against proposed reforms. The Wall Street Journal reported Friday Aguilar would consider a rule requiring money market funds to report daily fluctuations in their value just like any other mutual fund.

The fund industry, led by Federated and Fidelity Investments has fought this change fiercely since it would alert investors to the fact that a money market fund is riskier than a bank account. That awareness, in turn, would lessen the likelihood the industry would require a bailout, as it received in 2008 after an investment in short-term debt of Lehman Brothers led to a run on the $62 billion Reserve Primary Fund.

No publicly traded company would appear to have more at stake in the battle over money market fund regulation than Federated, which gets more than 40% of its revenue from money market products. But Bulent Ozcan, analyst at RBC Capital Markets, says it will take some time before Federated sees any hit to profits from a new rule.

Ozcan has an underweight recommendation on Federated and a $16 price target, largely as a result of the reform threat. Still, he doubts Federated shares will trade lower than $16, about 19% below Monday's close. He wasn't surprised by the muted reaction to Aguilar's softened stance, as he notes a rule still has to be proposed, passed and then implemented, which will likely take a good deal of time. Even after that happens, he doesn't expect investors to abandon money market funds en masse. He also believes Federated shareholders weren't that surprised by the renewed momentum for money fund reform, given that the Financial Stability Oversight Council, comprising all the top regulators, has made it clear it wants to do away with the industry's implied government backstop.

Still, given that Federated shares are up nearly 31% year to date, a 2% drop -- equating to less than $50 million on Federated's more than $2 billion market cap -- is probably too little. Indeed, the fact that Federated shares were hit on Friday rather than Monday appears to point to the fact that the money market fight has lulled everyone to sleep, delaying investors' reaction time.

But while regulation may take time, when the will is there it comes eventually. It's hard to see the upside for Federated shareholders in waiting to see their government subsidy taken away.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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