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Money market mutual fund lifeline

The government is throwing an unprecedented lifeline to money market mutual funds battered by withdrawals, as fear spreads regarding the investments that they hold.

The U.S. Treasury Department says a temporary guaranty program has been established for the money market mutual fund industry. For one year, the government will insure the holdings of any eligible publicly offered fund -- both retail and institutional.

Money market mutual funds, unlike money market accounts, are not guaranteed by the FDIC. However, many consumers view them as safe because the funds are subject to strict rules regarding the investments they can hold.

But the industry was rocked this week when a money market mutual fund's net asset value, or NAV, broke the buck -- dropped below $1 per share to 97 cents, meaning that for every $1 shareholders invested, they were only getting 97 cents back. The Reserve Primary Fund's drop below $1 was only the second time that's happened to a fund since 1994, when the Community Bankers fund liquidated. The Reserve Primary Fund had too much commercial paper from bankrupt Lehman Brothers to suit investors.

Yesterday, Putnam Investments closed an institutional fund, the Putnam Prime Money Market Fund, due to the "significant redemption pressure" even though the company reported no exposure to securities of Lehman Brothers, Washington Mutual or AIG.

Money market mutual funds throughout the industry experienced similar pressure as consumers and money managers withdrew billions of dollars.

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"People started looking at the prospectuses of these money market funds and saw that they're heavily weighted in financial companies because these companies issue a lot of commercial paper. The retail customer didn't want that exposure," says William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Mass.

The push to Treasuries

Amid the carnage in the stock market, much of that money tried to move into the only remaining safe haven -- U.S. Treasuries. The push into Treasuries was so great that some buyers were settling for no return.

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