Money funds sign up for guarantee
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. Treasury officials will review the program after the initial three months and will 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.