To stave off further instability in the U.S. capital markets, the Treasury Department announced Friday that it had established a temporary guaranty program for the U.S. money-market fund industry.
The pool, known as the Exchange Stabilization Fund, provides up to $50 billion to guarantee payments to investors in money market funds whose value falls below $1 per share. Maintaining the dollar mark is considered critical to making sure that investors feel that their deposits are safe.
Money market funds are a key savings and investment vehicle for America’s retail investors; however, they are also a basic source of financing for the capital markets and financial institutions. Therefore, by bolstering the funds with a government guarantee, Treasury hopes to stabilize financial markets and keep liquidity concerns and an already tight credit market at bay.
In effect, for the next year the U.S. Treasury will insure any publicly offered eligible money market fund — both retail and institutional — that pays a fee to participate in the program. Investors in money market mutual funds with a net asset value that falls below the dollar mark would be notified that their fund triggered the insurance program.
On Wednesday the Securities and Exchange Commission rushed out an accounting “clarification” aimed at allaying a potentially huge fear among banks: that providing financial support to money market mutual funds could require that those funds appear on the banks’ balance sheet. “[B]ank support of money market mutual funds generally does not result in a requirement to present the fund on-balance sheet,” the SEC’s office of the chief accountant said in a release.
President Bush approved the use of authority by Treasury Secretary Henry Paulson to make the guarantee available. The temporary insurance is similar to existing guarantee programs that currently protect savings deposits.