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Money
funds sign up for guarantee | | By Laura
Bruce • Bankrate.com |
| It appears that virtually all money market
fund families have subscribed to the U.S. Treasury's Temporary Guarantee Program
for Money Market Funds. Fidelity and Vanguard, among the last to jump onboard,
announced last week that they would participate, one day before the enrollment
deadline.
A public relations move
"Fidelity
and Vanguard had the luxury of waiting," says Peter Crane, publisher of Crane's
Data and Money Fund Intelligence. "It's more that Fidelity and Vanguard didn't
experience significant outflows. Most of them feel, 'why buy it anyway?' This
is really a public relations move. Nobody expects to use the insurance. This is
really just to put investors at ease. Certainly, had the run that was starting
in money funds developed into a full-blown run, everyone would have needed it.
You stop the run and you don't need the insurance. You don't stop the run and
you're dead anyway." The program protects whatever money you
had in a money market fund as of the close of business Sept. 19, 2008. If a fund
that participates in the program fails to maintain a net asset value of $1 per
share, the guarantee means investors will be fully reimbursed. The guarantee is
until April 30, 2009, and Treasury officials will review the program after that
to decide if it should be extended until Sept. 19, 2009. Pressure
from withdrawals
The unprecedented move to give a government guarantee
to money market funds followed the mid-September announcement that the Reserve
Primary Fund broke the buck -- meaning it failed to maintain a net asset value
of $1 per share. The fund, reportedly, had too much commercial paper from bankrupt
Lehman Brothers and investors decided to bail. Soon after,
Putnam Investments closed the Putnam Prime Money Market Fund due to "significant
redemption pressure." Money funds throughout the industry reported similar pressure
as consumers and money managers withdrew billions of dollars. The Treasury then
stepped in with its guarantee in an effort to stop the run. "There
was this massive shift in the high end of the institutional market; but the retail
market was barely impacted," says Crane. "Overall, the money funds were fortunate
to keep a lot of that cash in the house. Undoubtedly, some money went to banks,
but if you look at the numbers, it seems most of the assets stayed in fund complexes
and merely shifted from prime into Treasury or government." Although
it appears that all fund families have signed up, if you're concerned about a
fund that you were in as of Sept. 19, call your adviser or the fund company to
see if it's covered by the government's guarantee. Details
of the guarantee
Here are some of the details of the program, as
described by the U.S. Treasury. The program provides a guarantee
based on the number of shares held at the close of business Sept. 19, 2008. Any
increase in the number of shares held in the account after that will not be guaranteed. For
example: - If you owned 100 shares in a money market fund
as of the close of business Sept. 19, 2008, but you sold 50 shares the next week,
and the following week the fund broke the buck, you'd be guaranteed for 50 shares.
- If
you owned 100 shares as of close of business Sept. 19, 2008, and you bought an
additional 50 shares the next day, and then the fund broke the buck, you'd receive
100 shares. Upon liquidation, the fund would distribute proceeds to you for the
additional 50 shares -- which weren't guaranteed -- at the current net asset value.
- If
you owned 100 shares as of close of business Sept. 19, 2008, and then sold 50
shares and later bought 25 shares, payment would be guaranteed for 75 shares.
- If
you had no shares as of close of business Sept. 19, 2008, but you later bought
100 shares and then the fund broke the buck, your shares wouldn't participate
in the guarantee but you would receive the net asset value.
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