How Your Money-Market Fund Just Got Safer

By David S. Hilzenrath
Washington Post Staff Writer
Saturday, September 20, 2008

Until yesterday, individuals and businesses invested in money-market mutual funds at their own risk. Now, the government is offering to backstop such investments. The program was put together so quickly that the government was still nailing down the specifics yesterday. "All the details are subject to change as we work it out," a Treasury Department official said. Here's what we can tell you.

Q What's a money-market fund?

AIt's a form of mutual fund that typically offers a somewhat higher return than bank accounts along with the advantage of checking services. The funds are required to be invested in relatively low-risk assets, such as Treasury securities and the short-term instruments many big businesses use to finance their operations.

Which funds are covered?

To benefit from the federal guaranty, funds must choose to participate and pay a fee. To see if your fund is covered, check with your fund manager in the near future.

Funds that invest only in Treasury securities are not eligible -- those securities are already backed by the government. Funds that invest in tax-free municipal bonds are not eligible either because government officials were concerned that the guaranty could affect their tax status.

It remained to be determined whether funds that invest in bonds of the government-sponsored mortgage funding giants Fannie Mae and Freddie Mac, known on Wall Street as agency securities, will be eligible, Treasury officials said. However, with the government's recent seizure of Fannie and Freddie, the government in effect stands behind their obligations.

Are there limits on coverage?

The government was not planning a limit. That would contrast with the protection bank accounts get from the Federal Deposit Insurance Corp. With some exceptions, the FDIC limits coverage to $100,000 per depositor per bank.

The unlimited protection for money-market funds could make them a more attractive place than bank accounts to park your money, as the American Bankers Association protested yesterday.

"Simply put, the ability of bank[s] to attract and keep deposits is being compromised in a profound fashion," Edward L. Yingling, president of the association, said in a news release.

The guaranty program for money-market funds is set to last for a year, and the government has committed up to $50 billion. It's unclear what would happen if the need exceeded $50 billion. To put that number in perspective, at the end of July taxable nongovernmental money-market funds had $2.1 trillion in assets, according to the Investment Company Institute, a mutual fund industry group.

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