Treasury to tap into $50 billion fund to guarantee market assets; Fed will extend emergency lending.
By JERUSALEM POST STAFFwall street 224 88(photo credit: )
The Treasury Department and the Federal Reserve announced separate actions Friday designed to bolster $2 trillion of assets in money market funds, which had come under threat from one of the worst financial crises in decades.
The Treasury said it will tap into a $50 billion fund created during the Great Depression to provide guarantees for the money market assets. 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 US 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 September 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 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.
US President George W. Bush authorized Treasury Secretary Henry Paulson to use the resources of the exchange 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.
On Wednesday alone, investors pulled more than $89 billion from money-market mutual funds, according to data from iMoneyNet, publisher of the newsletter Money Fund Report. Combined with an additional $80 billion removed in the five preceding business days, total fund assets shrank nearly 5 percent from Sept. 10 to Wednesday, when the total stood at about $3.4 trillion.
Treasury officials said that approximately $2 trillion in money market mutual fund assets will be covered by the guarantees. The assets that will be covered will be holdings of any publicly offered money market mutual fund, both those that have retail customers and those with institutional customers. Funds that participate in the guarantee program will be charged a fee but Treasury officials did not provide any specifics on the size of the fee.
Some $2.1 trillion of that $3.4 trillion total held in money market mutual funds is held by institutional investors such as corporations and pension funds, with the remainder held by retail investors. The run on funds has been fastest among institutional funds, which have been increasingly wary of risky investments amid a volatile market, and can quickly move large blocks of holdings to more liquid investments.
The Investment Company Institute, an industry organization, reported Thursday that assets in institutional money-market funds fell by $173 billion for the week ended Wednesday.
The moves by Treasury and the Fed "will likely save the money-market fund business," said Peter Crane, president of Crane Data, publisher of the money-market fund newsletter, Money Fund Intelligence. "It was getting quite dire, though funds could have withstood another couple of days of redemptions like they were seeing. But had it accelerated, you would have seen a dire threat of incidents of breaking the buck occur all over the place."
When a fund suffers a sudden rush of orders to pull out money, fund managers must sell assets - typically at a loss when it must be done quickly, and especially amid this week's market turmoil.
The rush out of funds by institutional investors created the greatest risk, Crane said.
Institutional investors "are trading blocks of $1 million to $10 million and $100 million at a time, rather than $10,000 or $100,000" for the retail investor, Crane said.
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, Treasury said.
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