In an unprecedented effort to plug a run on money market mutual funds, the federal government has put into effect a temporary guaranty insurance program for money funds.
The program, which started last week, will insure participating money market funds until Dec. 18. After that, the Treasury Department can decide whether it wants to extend the program to Sept. 18, 2009.
It's great news for investors of money funds, which are viewed as ultra-safe places to park cash you can easily get to.
"The announcement of the program effectively stopped the run on money funds and should prevent investors from hurting themselves," said Peter G. Crane, president and publisher of Crane Data LLC, which tracks money funds.
Money funds strive to maintain a price per share of $1, meaning that investors typically can expect to get back $1 for every dollar they invest in the fund, plus any interest or dividends the fund earns.
The root of the recent panic lies in troubles at the Reserve Primary Fund, a money market fund that fell below the sacred $1-per-share level, a rare but serious occurrence also known as "breaking the buck."
The Reserve became the second ever money fund to break the buck, according to the Investment Company Institute.
At the height of the panic – from Sept. 15 through Wednesday – small investors yanked $44 billion from nongovernment money funds, according to iMoneyNet, which compiles money fund data.
At the same time, $61.9 billion went into government retail money funds, which invest in Treasury securities, government agency debt and repurchase agreements backed by government entities.
"As long as we see outflows in the prime [nongovernment] funds – it means that people are just not 100 percent comfortable," said Connie Bugbee, managing editor of iMoneyNet.
Government officials are hoping that the insurance program will restore confidence in money funds.
The program doesn't work the same way as bank deposit insurance administered by the Federal Deposit Insurance Corp.
For one thing, there are dollar limits to deposit insurance. The money fund insurance program doesn't have a cap on the amount that's covered.
Also, the coverage isn't automatic. Each money fund must decide to participate in the program and must apply by Wednesday.
Call your fund and encourage it to apply.
"I'd expect 100 percent participation," Mr. Crane said.
Funds planning to participate include:
•Invesco Aim
•First American Funds
•TCW Money Market Fund
•Federated Investors Inc.
•Evergreen Investments
•Dreyfus Money Market Funds.
Vanguard and Fidelity Investments are evaluating the program.
The coverage, triggered when a participating fund breaks the buck, protects investors based on the number of money fund shares held at the close of business on Sept. 19.
Any increase in the number of shares held in an account after that date will not be insured.
Don't let the temporary insurance program lead you to equate a money fund with a bank deposit. It's not the same as a money market deposit account at a bank, which is FDIC-insured.
And remember: A money fund may strive to maintain $1 per share, but it's still an investment, which carries a risk.
