Treasury to Guarantee Money Market Funds By DIANA B. HENRIQUES

September 20, 2008
Treasury to Guarantee Money Market Funds By DIANA B. HENRIQUES

The federal government took two aggressive steps on Friday to restore confidence in money market funds, which consumers have long considered to be as safe as bank savings accounts, but which have come under increasing stress in the current market turmoil.

The Treasury Department announced that, at least temporarily, it would guarantee money market funds against losses up to $50 billion.

“For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund — both retail and institutional — that pays a fee to participate in the program,” the Treasury said in a statement.

And to make sure there is an adequate market if money funds have to sell assets to meet withdrawals, the Federal Reserve said that it would expand its emergency lending program to help commercial banks finance the purchase of asset-backed securities from the funds.

Money funds held more than $3.4 trillion in investor funds, as of the most recent industry tally released Thursday, down almost $170 billion from the previous week. The Treasury said concerns about the value of money market funds falling below the standard net asset value of $1 a share — or “breaking the buck” — had heightened the financial turmoil and caused severe liquidity strains in world markets.

“This action should enhance market confidence and alleviate investors’ concerns about the ability for money market mutual funds to absorb a loss,” the Treasury statement said. “Investors in money market mutual funds with a net asset value that falls below $1 would be notified that their fund triggered the insurance program.”

Treasury also said that President Bush had approved use of the Exchange Stabilization Fund, established in the 1930s to intervene in foreign exchange markets, to guarantee the payments.

In its statement, the Fed said that it would expand its emergency lending to allow commercial banks to finance purchases of asset-backed paper from money market funds. It also said that it planned to purchase short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which offers financing for mortgages, small businesses and farms.

Money market funds are essentially short-term mutual funds that invest in government securities, certificates of deposit, asset-backed commercial paper and other highly liquid securities.

They are different from money market deposit accounts, which are offered to consumers by many banks and credit unions. Those are interest-bearing bank accounts that are insured — up to $100,000 an account and up to $250,000 for some retirement accounts — by the Federal Deposit Insurance Corporation. Joint accounts, each account holder is insured for $100,000.

The actions to reinforce confidence in money market funds came in a week when one multibillion-dollar fund was forced to close and liquidate and another said that its customers might lose money on their investments.

Putnam Investments, one of the oldest names in the mutual fund industry, announced Thursday that it was liquidating its Putnam Prime Money Market Fund, a $12.3 billion fund that serves only professional investors.

With liquidity dwindling in the short-term credit markets — a problem that did not ease significantly in Thursday’s trading — the fund’s board determined on Wednesday that selling assets to meet redemptions would risk losses for the remaining investors, Putnam said.

On Tuesday, the Primary Fund, which had almost $65 billion in assets at the end of May and is part of the Reserve Fund, said the value of some investments had fallen and that customers had only 97 cents for each dollar they had invested in several of its funds. The company has subsequently imposed redemption limits on 18 money funds it operates.

The Investment Company Institute, an industry trade association, said Thursday that the funds serving institutions shrank by more than $173 billion, to $2.17 trillion, in the week that ended Wednesday — the worst decline ever among institutional money funds. Retail investors, however, added almost $4.3 billion to their money fund holdings, for a net decline of $169 billion during the week.