Money Market Guarantee Program To Expire Next Week

The U.S. Treasury Department announced last week that it will end a program which provided a temporary guarantee for money market funds.  The program was installed about a year ago when the nation’s financial crisis was near its peak.  The government essentially backed about $3 trillion in the money market space after a large fund saw its asset value fall below $1 for each dollar deposited.

Sometime around late September 2008, the Primary Reserve Fund admitted that the $785 million it had invested in Lehman Brothers debt became worthless after the investment bank went bankrupt.  The fund was run by Reserve Management Co, based out of New York.

The news sparked mass withdrawals from the fund and pushed it to the brink of collapse, leading the government to launch the money market guarantee program in order to stabilize the overall market as runs on other money market funds were also occurring.

The U.S. Treasury is set to end the program on September 18.  The program earned the government over $1 billion in fees collected from money market funds that paid to participate.  When the program first started nearly every money market fund participated.  However, many funds that invest only in U.S. Treasury notes dropped out after a short time, since Treasuries already have the backing of the U.S. government.

The program provided a safety net for depositors, covering balances in taxable and tax-free money market funds.  Money market funds are generally viewed as the safest thing to a savings account that you can generate better returns from.  The demise of the Primary Reserve Fund marked just the second such occurrence in nearly four decades since the first money market fund was established, which just so happens to be the Primary Reserve Fund.

The only other failure occurred in 1994 by a small fund that did not produce near the negative impact the Primary Reserve Fund did, which held $62 billion in assets shortly before its demise.

Since the launch of the guarantee program, the Securities and Exchange Commission has proposed rules that it believes would increase the resilience of money market funds and reduce the risk of future withdrawal runs.

According to some of the proposed rules, money market funds would have to hold a certain portion of assets in cash of short-term securities that can quickly be converted into cash.  There are currently no such rules requiring funds to do that.

The SEC said its proposed rules would only drop money market yields by 0.02 to 0.04 percent on average, but many money market funds have already begun to debate it would be higher.