Money markets get a lifeline
Jim Higgins
http://money.cnn.com/2008/09/19/markets/money_markets/index.htm?cnn=yes
NEW YORK (CNNMoney.com) -- The Treasury Department and Federal Reserve
took steps Friday to help stabilize the U.S. money market fund industry,
which has come under severe strain following the dramatic events that
took place across the financial system this week.
The Treasury said it would guarantee up to $50 billion dollars for the
next year for both retail and institutional investors.
Complementing that was a double-edged plan by the central bank, which
would include the Fed offering loans to banks to provide them with the
cash they need to meet the withdrawal demands of money market customers.
The Fed also said it would purchase short-term debt issued byFreddie Mac
(FRE, Fortune 500), Fannie Mae (FNM, Fortune 500) and the Federal Home
Loan Banks, which would also help stabilize broader money markets.
Money market funds invest in short-term debt issued by the federal
government or by companies, and are widely used by consumers as a place
to stash their extra cash.
Typically, putting money in these funds was thought to be as safe as
money in the bank.
But these funds, which also serve as a fundamental source of financing
for both financial institutions and capital markets, have come under
severe strain in recent days following the dramatic events from earlier
this week - including the dramatic collapse of Lehman Brothers (LEH,
Fortune 500) and the federal government's rescue of the insurance giant
AIG (AIG, Fortune 500).
Fearing that many of these funds could see their value wiped out,
several financial institutions - including Wachovia's (WB, Fortune 500)
Evergreen Investments and Frank Russell Funds - announced plans Thursday
to step in to prop up their funds now. But experts seemed certain that
they could not do it indefinitely.
The Treasury Department said the action announced Friday should help
return some confidence to the market and alleviate investors' fears
about the ability for money market mutual funds to absorb a loss.
Money market funds would have to pay for the guarantee much in the same
way that banks are required to pay the Federal Deposit Insurance Corp.
to insure consumers' bank deposits, an agency official said.
A Treasury Department official briefing reporters Friday said there
would be no limit on protection of money market assets under a new
insurance program.
The announcement also comes ahead of a widely expected, yet-to-be
announced massive government rescue plan aimed at containing the
financial crisis.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben
Bernanke met with top lawmakers Thursday to discuss the plan.
Details of the plan remain cloudy, although it likely that the
government could absorb billions of dollars in mortgage assets.
--
Civis Romanus Sum