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.
What's the downside for investors in money- market funds?
With lower risk they could reap lower returns.
Peter Crane of Crane Data, which tracks money funds, predicted the fee would be passed along to investors, reducing the yield on their money-market investments. The size of the fee hasn't been announced.
For the week that ended Thursday, the average yield at the 100 largest money-market funds was 2.3 percent, Crane said
How easily funds could pass along the fee is an open question. If the fee is levied on fund managers and they want to recoup it from their shareholders, they would need to put the matter to a shareholder vote, said Mike McNamee, a spokesman for the Investment Company Institute. Alternatively, the government could let funds pay the fee directly out of shareholder assets.
What would trigger a payout on the federal insurance?
If the net asset value of a fund sank below $1 per share, where it's supposed to stay, the fund would be liquidated and investors would be made whole.
What about money-market deposit accounts?
Money-market deposit accounts are a different animal. They are insured by the FDIC. Some banks also offer money-market mutual funds, so take care to avoid confusing the two.
Why did the government do this?
To avoid the equivalent of a run on the bank -- and to keep a linchpin of the financial system functioning smoothly.
In recent days, confidence in money-market mutual funds was shaken. Two major funds encountered trouble. One announced it was devaluing shares after the value of its investments dropped. Another fund closed in a bid to limit losses to its investors.
According to the Investment Company Institute, money-market fund investors withdrew a record $169 billion during the seven-day period that ended Wednesday. Meanwhile, the market was freezing up for the corporate securities that are the bread and butter for many funds.
One of the safest havens in the financial markets, and one on which many businesses depend, was suddenly imperiled.
"If the steps taken today succeed in unlocking the markets, we have every hope and expectation that this insurance pool will never be drawn," said Paul Schott Stevens, president of the Investment Company Institute.