U.S. offers insurance guaranty to money market funds

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The Treasury today offered federal insurance coverage to protect money market mutual funds, hoping to halt a run on the $3.4-trillion industry after one fund suffered losses on IOUs of failed brokerage Lehman Bros. Holdings Inc.

From a Treasury news release this morning:


The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund –- both retail and institutional –- that pays a fee to participate in the program.

Cash has been exiting some money funds this week after the Reserve Primary fund, one of the nation’s oldest money funds, said on Tuesday that losses on Lehman Bros. IOUs caused the portfolio to ‘break the buck’ -- fall below $1 a share.

Investors have been fearful that other funds could break the buck as well. Those worries were amplified on Thursday, when Putnam Funds said it would close and liquidate a $12.3-billion institutional money fund because of a surge in investor redemptions.

Spooked investors yanked a net $169 billion from money funds in the week ended Wednesday, reducing total industry assets by 4.7%, to $3.41 trillion, the Investment Company Institute said on Thursday. But most of the money was being pulled by big investors, not individuals.

On a daily basis, the outflow on Thursday alone was $56.1 billion, down from $89.2 billion on Wednesday, according to iMoneyNet Inc., which tracks daily cash flows.

With the Treasury’s move today, the government clearly is trying to keep small investors from joining what has so far been a limited institutional exodus.

It’s not clear yet how many fund companies will join the insurance facility, but in this environment it would seem foolish for any fund to opt out and risk raising questions about its safety.