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Treasury, Fed move to bolster money market funds

(Agencies)
Updated: 2008-09-19 22:09

WASHINGTON -- The Treasury Department and the Federal Reserve announced separate actions Friday designed to bolster the nation's $2 trillion of assets in money market fund assets, which had come under threat from one of the worst financial crises in decades.

Federal Reserve Chairman Ben Bernanke (C) speaks next to Treasury Secretary Henry Paulson (L), and House Speaker Nancy Pelosi (D-CA) after their meeting with other congressional leaders in the US Capitol in Washington September 18, 2008. [Agencies]

The Treasury said it will tap into a Depression-era fund to provide guarantees for the money market mutual funds. The Fed said it will expand its emergency lending efforts to allow commercial banks to finance purchases of asset-backed paper from money market funds. The central bank's move should help the funds to meet demands for redemptions.

The central bank, which has moved aggressively in recent days to pump money into the nation's financial system, also announced Friday it plans to purchase short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, a source of low-cost funding for mortgages, small businesses and farms.

The effort was seen as another way to pump money into the financial system and convince banks to begin lending again and stop hoarding cash, which was choking financial markets and threatening the already fragile economy. The government on Sept. 7 announced that it was taking control of Fannie and Freddie because of huge losses the two mortgage giants were experiencing on mortgage loans.

The Treasury Department said it would use its $50 billion Exchange Stabilization Fund to provide the guarantees for the money market mutual funds. The exchange fund was created in 1934 to provide support for the dollar.

Fears were raised about the giant money market mutual fund industry earlier this week when Primary Fund announced that the value of its fund's assets had dropped to 97 cents for each $1 put in by investors, exposing them to losses.

This instance of "breaking the buck" marked only the second time since money market mutual funds were begun in the United States in 1970 that a fund couldn't assure clients of the full value of their investments.

President Bush has authorized Treasury Secretary Henry Paulson to use up to $50 billion from the Exchange Stabilization Fund to provide the guarantees, Treasury said in a statement.

"Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system," Treasury said in its statement.

Treasury said its decision to provide guarantees "should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss."

When the assets in a fund fall below the $1 redemption level, investors in that particular fund would receive a notification that their fund would be covered by the insurance program.

During the next year, Treasury said it will insure the holdings of publicly offered money market mutual funds including both retail and institutional funds.