Update on money fund guarantee program

by Philip Brewer on 29 September 2008 0 comments

The key thing to know about the Temporary Guarantee Program for Money Market Funds that the Treasury announced 10 days ago is that it only guarantees the money that you had in the money fund on that date.  Any money you have in the fund that exceeds your balance on September 19th is not guaranteed--those shares are only worth their net asset value.

I posted when the Treasury announced the guarantee plan.  Now the Treasury has released the details, in the form of a press release and an FAQ.

The plan was created for a simple reason:  Money funds are key buyers of commercial paper and jumbo bank CDs.  If shareholders in money funds chose to switch to more secure assets, the money funds would have no choice but to sell those assets--and if that happened to all money funds at once, there'd be no buyers.  The result would have been a sudden collapse in the value of what had previously been the safest non-government assets.

With that in mind, the odd structure of the guarantee plan makes a certain amount of sense.  They don't want to get into the business of guaranteeing money funds.  Doing that would have a pernicious effect on the incentives of money fund managers.  (Currently they compete on safety and yield.  If all funds were equally safe--guaranteed by the Treasury--they would only compete on yield, driving fund managers toward the riskiest allowed investments.)

Now, though, it is only old money that's equally secure in all money funds.  Any new money will only be as secure as as the assets of the fund, meaning that anyone looking for a place to put their money still needs to focus on safety.  That should work to keep the incentives of the fund managers properly aligned.

Two other points:

  1. The plan is temporary, initially in place for just three months, it can be extended by the Secretary of the Treasury for up to one year.
  2. The plan only applies to money market funds that choose to join and pay a fee.  The Treasury says to contact your fund to learn if they're participating in the program.  (Individual investors can't sign up for the program individually.)

Whatever money you had in a money fund 10 days ago is as safe as any investment can be in these troubled times (assuming your fund participates in the plan).  For any new cash that you'd like to put away for the future, picking a money fund will require the sort of research you should have been doing right along.

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