U.S. Treasury to Guarantee Money-Market Funds

Posted by Sun on September 19, 2008

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Yesterday, I talked about why money-market funds may not be as safe as you think, after The Reserve Primary Fund cut the NAV of the fund from $1 to 97 cents. Even though money in mutual funds (money-market funds are mutual funds) are not insured or guaranteed by the government, the nature of the investments held in money-market funds requires funds put the safety of the money first. Breaking the buck at The Reserve Primary Fund marks only the second time since 1970 that a money-market fund failed to maintain the full face value of investors money, but the impact could be huge for the $3-trillion money-market fund industry.

This morning, NYT has a report that the U.S. Treasury is to guarantee the full value of money-market funds:

Seeking to deal with a severe financial crisis, the department said Friday that for the next year the U.S. Treasury will insure the holdings of eligible money market mutual funds.

The money to insure the mutual funds will come from the Treasury Department’s Exchange Stabilization Fund which was created in 1934 to provide support for the dollar.

Though no word on what will happen for the remainder of this year, but the move could ease investors’ nerve on their money. If money-market fund investors start to run on the fund, it could have catastrophic consequences.

The fund that guarantees money-market funds will have $50 billion cash, similar to the size of the fund FDIC uses to insure deposits.