Money Market Funds: Treasury to the Rescue

Holdings will be insured.


To stave off a money-market mess and restore confidence to the financial markets, the Treasury says it will insure the holdings of money-market funds that pay a fee.

The Treasury announced plans Friday to use up to $50 million from the Depression-era Exchange Stabilization Fund to guard money-market funds from a collapse and shore up confidence in the financial markets.

"Concerns about the net asset value of money market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets," the Treasury said in a statement.

Meanwhile, the Fed announced its own plan to meet the demands of money-market redemptions. It will expand emergency lending to allow commercial banks to finance purchases of asset-backed paper from the funds.

In related news, T-bills were knocked lower early Friday after piling in Thursday on intense market unrest.

Earlier this week, the Reserve Primary Fund "broke the buck" when its shares fell to 97 cents (money market funds strive to maintain a stable value of $1 per share.) Once the fund crossed that threshold, its adviser halted redemptions as a flood of investors bolted, further exacerbating the fund's decline. On Wednesday, shareholders who didn't redeem their shares before the company halted redemptions filed a lawsuit against the fund's adviser.

Other firms are running into trouble. Putnam Investments said Thursday that it's liquidating the institutional Putnam Prime Money Market Fund and distributing the fund's assets.

Investors pulled a record $89.2 billion from money market funds on September 17, according to the newsletter Money Fund Report (via Bloomberg).

So money market investors, breathe deep.