Treasury Money Market Guarantee Finally Launched

We had grumbled last week that the Treasury had left its money market guarnatee program in the never-never land of “we’ll get back to you with details. The program is now in effect on a short-term basis. One hang up with any program of this sort is that the powers that be do not want the money market backstop to be superior to that on insured deposits; that risks a run on banks.

It also isn’t clear what the level of uptake by money market funds will be, since the program charges a premium to participating fund and the money market fund business is notoriously low margin. If funds feel they have to participate, the casualty is likely to be fund yields. However, on the surface, the charge of one basis point per share for ninety days of coverage does not appear onerous.

From Reuters:

The U.S. Treasury Department said on Monday its temporary guarantee program for money market mutual funds for assets held as of Sept. 19 was now in effect for at least three months.

The Treasury said each fund regulated by the Securities and Exchange Commission under rule 2a-7 that maintains a stable share price of $1 can now decide whether to participate in the program.

Money market mutual fund shares acquired after Sept. 19, when the Treasury announced the plan, will not be guaranteed under the program.

To receive the government guarantee, participating money market mutual funds that had a net asset value of at least $0.9975 per share on Sept. 19 must pay a fee of 1 basis point per share to the Treasury.

Those with a net asset value below $0.995 on Sept. 19 are not eligible for the program, and those between $0.995 and $0.9975 on that date must pay a 1.5 basis-point fee.

The Treasury created the program to try to stem a massive run on some $3.4 trillion in money market mutual fund assets after one major fund fell below $1 per share — a phenomenon known as “breaking the buck”.

The Treasury program guarantees a participating fund that funds held on Sept. 19 will remain valued at $1 per share if they break the buck. The program will use about $50 billion from the Exchange Stabilization Fund, which was created during the Great Depression to help stabilize the dollar.

U.S. Treasury Secretary Henry Paulson will review the program after a three-month term to determine whether to extend it. Funds will have to pay an additional fee to renew their participation if the program is extended.

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  1. francois-guillaume

    if i was an IB full of crappy CPs or ABCPs… id make a brand new MM fund which would buy tons of those at 1$ while its worth 10cents…
    the 50bn $ will be history in a matter of days, if not hours ????

  2. Yawner


    And that would do nothing since the fund had to exist 9/19. This program is nicely done in that it prevents any new money from leaving banks to go into MMFs.

  3. don

    I’ve read where only existing deposits in MM Funds are covered by the insurance, and that the insurance does not apply to new money deposited.

  4. Peripheral Visionary

    Also bear in mind that money market fund holdings are extremely stringent. While AAA ratings were slapped on everything, everything qualified, but now that the ratings agencies are in retreat, not a lot of paper qualifies. What prompted this all is LEH going under; as long as there aren’t any more major B-Ds going down, the money markets should hold up and (hopefully) things will unstick and get moving again.

    I don’t see this insurance as being used much; even 1 bp per 90 days may be seen as a burden in an industry with razor-thin margins, but it will be useful to build confidence. But hopefully the “temporary” aspect will be realized. The competition against bank deposits is a valid concern, but then, when Goldman Sachs is queuing up to try to attract depositors, everyone is competing for cash these days.

  5. Elizabeth

    1bp is shockingly cheap. The difference in yield between conservative and not-conservative investments is probably 3% at this point. This is a potential disaster in the making!!!!

    Also, muni money markets are going to blow since they own almost exclusively VRDNs, ARS with a liquidity guarantee from XYZ financial institution.

    Btw Money market fund margins are generally NOT razor thin. They charge huge fees, take some risk and rake in the dough from lazy retail clients.

  6. Anonymous

    CONGRATULATIONS!!! Yves — you and Mish and Roubini and all of you have done it — the bill has not passed. Yes we will have a bloody day, week, several years…but it would have come to pass anyway.

  7. Anonymous

    Huh … I don’t seem to recall any debate or legislation regarding a “money market guarantee program.”

    Maybe I got drunk and missed it.

    Oh wait, I forgot — we’re under “financial martial law” now. Rule by decree, and all that. So Hank can just roll out of bed and make this stuff up, the way ol’ Frank Roosevelt used to fix the gold price.

    So was today’s triumph in the House just a pyrrhic victory? I mean, if Hank can create scribble a money market guarantee program on a lipstick-stained cocktail napkin, why can’t he just write himself a check for $700 billion?

    Beats the hell outta me …

    — Juan Falcone

  8. Erich Riesenberg

    Elizabeth, any fund that breaks the buck, and does not fix it internally or with a parent, US guarantee or not, is out of business. And, the guarantee is messy, retroactive.

    Is anyone else fascinated by the Reserve Funds? I considered them conservative, based on their rhetoric, though I stick with Vanguard. I am eager to find out if they did indeed tip large investors off to the Lehman loss.

    I am also curious why they stuck at $1 the Monday when Lehman declared bankruptcy, and did not write down the debt until Tuesday.

    Two actions I would think would be cause by investors.

  9. Anonymous

    @ Anon 9/29 4:24pm:

    If the Economic Stabilization Act had passed, Treasury would have been barred from using the Foreign Exchange Stabilization Fund as a piggy bank to fund the costs of this program.

    The libertarian in me says the whole program is bad and a moral hazard. Read your prospectuses, people! “No promises that a $1.00 NAV will be maintained.” How could it be clearer?!?

    I’ll answer my own question. Our industry is addicted to complexity. We have Prime mmkt, Govt mmkt, Tsy mmkt, Tsy w/repos mmkt, Tsy w/no repos mmkt funds, muni state-specific mmkt funds, muni no-AMT mmkt funds. It’s no wonder people were confused. But why don’t they read the prospectuses?

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