Oh boy, bye bye the US AAA rating (at some point, not due specifically to this move, but from the philosophy it represents) and the dollar. The financial markets are simply too large for the US taxpayer to stand behind them all, but that isn’t going to prevent the authorities from trying. And like the Term Auction Facilty, expect it to be some time before this “temporary” guarantee is reversed.
Details not out quite yet, will update the post soon. It shows in “Breaking News” at the Wall Street Journal.
Update 8:25 AM: Here is the Treasury press release. Money market funds must pay a fund to receive the guarantee. Presumably, who pays the fee will not be disclosed (the powers that had to create the Term Auction Facility, which does not reveal who its users are, to overcome the stigma of accessing the discount window). But will money market funds sign up on a large scale basis? Funds that are part of fund families may deem it cheaper to absorb losses than pay the fees. This move may be directed at stand-alone money funds like Reserve.
In other words, like the recently passed $300 billion housing bill that is widely anticipated to have considerably less takeup than its maximum amount, this may expose the Treasury less that it appears to. However even though the press release says the backup will exist for the next year, expect it to be renewed.
From the press release
The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.
President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund for up to $50 billion to guarantee the payment in the circumstances described below….
The Exchange Stabilization Fund was established by the Gold Reserve Act of 1934. This Act authorizes the Secretary of the Treasury, with the approval of the President, “to deal in gold, foreign exchange, and other instruments of credit and securities” consistent with the obligations of the U.S. government in the International Monetary Fund to promote international financial stability. More information on the Exchange Stabilization Fund can be found at http://www.treas.gov/offices/international-affairs/esf/.
A look at the balance sheet of the Exchange Stabilization Fund shows that it had assets of $47.9 billion as of its fiscal year ended September 30, 2007.
In other words, the Treasury had some spare cash sitting around it could deploy for this purpose. Clever.
Update 8:50 AM: Oh, there are more dollar signs this move than just the Treasury deploying assets from an idle fund. Bloomberg reports “Fed to Help Meet Fund Redemptions, Buy Agency Debt “:
The Federal Reserve said it will lend to banks to meet demands for redemptions from money-market mutual funds and plans to buy agency debt from primary dealers to aid financial-market liquidity.
The Fed will extend loans to banks to purchase “high- quality” asset-backed commercial paper from money market funds, the Fed said in a statement in Washington. The loans will be at the discount rate, the Fed said. The rate is currently 2.25 percent. The Fed didn’t provide a size for either initiative….
The central bank said it will buy short-term discount notes issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks “to further support market functioning.”
The Federal Reserve Board on Friday announced two enhancements to its programs to provide liquidity to markets. One initiative will extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP markets and broader money markets.
To further support market functioning, the Federal Reserve also plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks…..
Similar to secondary market purchases of Treasury securities, purchases of Fannie Mae, Freddie Mac and Federal Home Loan Bank debt will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions via the Desk’s FedTrade system. A series of purchase operations are planned over the next several weeks.
The ABCP market went into serious contraction in the first acute phase of the credit crisis (September-August 2007) and has continued contracting since then. Wonder why it is a focus now. Is this to keep the auto loan and credit card receivables market going? Informed readers are encouraged to speak up.