New U.S. insurance plan staunches money fund outflows

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From Times staff writer Josh Friedman:

One multi-trillion-dollar bit of good news from the financial system today: The U.S. Treasury’s move to create an insurance program for money market mutual funds appears to have halted the recent run on the portfolios.

The net outflow from the funds, which hold $3.3 trillion in investor assets, slowed to a relative trickle of $5.2 billion on Friday -- the day the government unveiled the insurance plan -- according to iMoneyNet of Westborough, Mass.

The surprise announcement ‘must have helped to stem the tide,’ said Connie Bugbee, iMoneyNet’s managing editor.

Industry redemptions had soared to a net $85.4 billion on Wednesday as investors reacted to news that the Reserve Primary fund had ‘broken the buck,’ or fallen below $1 a share in value, because of losses on IOUs of failed brokerage Lehman Bros. Holdings Inc. Reserve Primary was only the second fund in the industry’s 37-year history to lose principal value, so the news left many fund investors stunned.

On Thursday total money fund redemptions slowed somewhat but still were significant at $47.7 billion.

Figures for today weren’t yet available, but they’re likely to show a net cash inflow, said Peter Crane, president of Crane Data, also of Westborough (the undisputed money-fund data capital of the world).

‘Whether the protection turns out to be strong or weak, the run has halted enough to end the immediate threat to money funds,’ Crane said.

The Treasury issued a statement over the weekend providing ‘further clarity’ about the guarantee program, which is voluntary for fund firms. Tax-exempt funds, which initially weren’t included, now will be eligible for coverage. Also, the insurance will cover all amounts investors held in money funds as of Friday’s trading close, though not new investments.

But today, Sen. Christopher Dodd (D-Conn.), head of the Senate Banking Committee, was said to be favoring a $100,000-per-investor limit on the money-fund insurance coverage, similar to the basic Federal Deposit Insurance Corp. coverage on bank accounts.

‘Things may change as various parties get their say,’ Crane said. ‘Stay tuned because the horse trading has just begun.’

Calls to Dodd’s office were met with fast-busy signals. Could lobbyists have been hogging the lines?