Money-market mutual fund guarantees are withdrawn

DES MOINES, Iowa --- At a time when investor confidence is still a bit shaky, one of the money-market mutual fund safeguards the government has offered in the past year has been allowed to expire.

Traditionally, money-market mutual funds offer investors a safe place to park cash, earning at least some interest while keeping the money accessible through checks or withdrawals.

The funds typically invest in U.S. Treasury bills, government agencies such as the Federal Home Loan Bank or safer corporate bonds. But they don't offer any guarantees. They are unlike a bank's money-market deposit account, which is guaranteed by the FDIC.

Until September 2008, money-market mutual funds had seen only one case in which a fund could not pay investors a dollar for every dollar invested. That's when the Reserve Primary Fund "broke the buck," meaning investors seeking to withdraw funds could suffer losses. It was only the second such incident since the launch of money-market mutual funds in the early 1970s.

Treasury officials, hoping to stem a rush by panicked money-market fund investors to withdraw, stepped in soon after to insure investors against losses. The government last week determined that the widespread risk of investment losses has passed and the guarantee program was no longer needed.

Here are some questions and answers about the program.

Q: What does the end of the program mean?

A: The program to guarantee the more than $3 trillion in money funds was initiated by the Bush administration in September 2008, after Lehman Brothers failed, the stock market began a rapid decline and fear caused investors to pull their money out of some funds.

The $60 billion Reserve Primary Fund announced the value of its assets fell to less than a dollar for every dollar invested. In this case, 97 cents. That exposed investors to possible losses. It appears by the time court challenges are finished, they might get only 92 cents on the dollar.

To help maintain investor confidence in the industry, the Treasury department initiated the guarantee. It was not made retroactive, however, to cover the Reserve Primary Fund. Had another fund broken the buck, the Treasury would have guaranteed against investor losses.

The government extended the program in 90-day increments, but each time the total amount of fund assets guaranteed dropped. At the start of the program 93 percent were covered, but by the end only 68 percent remained. If a money fund were to break the buck now and a shareholder insisted on cashing out immediately, that investor could lose money.

Q: What caused the Reserve Primary Fund to break the buck?

A: It was holding corporate bonds issued by Lehman Brothers. When Lehman Brothers declared bankruptcy, the $785 million in securities held in the Reserve Primary Fund became worthless. That drove down the valuation of the fund's portfolio and caused the price per share to fall below $1. Investors sought immediate return of their money, but the fund could not guarantee they would get all of their money back. During the week in September when the Primary Reserve Fund broke the buck, investors pulled about $300 billion from prime money-market funds, about 14 percent of the money invested in those funds.

Q: What assurance is there that my money is safe in money-market funds now?

A: It's rare for money-market mutual funds to lose their dollar-for-dollar value, said Connie Bugbee, the managing editor of iMoneyNet, which has been tracking the funds since 1975. While there is no guarantee against loss, a long history of safety should be an assurance, she said.

Q: Have there been any regulatory changes that provide more assurance my money won't be lost?

A: Not yet, but there are some proposals that are being explored and a group appointed by President Obama is looking into more sweeping changes.

The Securities and Exchange Commission is looking at regulatory changes and is expected to decide by the end of the year which changes will be enacted.

Q: Did the guarantee program cost the government any money?

A: No. The U.S. Treasury actually brought in about $1.2 billion in participation fees, said department spokeswoman Meg Reilly.

Q: What happens to that money now?

A: The money goes into the Exchange Stabilization Fund, operated under the direction of the Treasury Secretary, who can authorize the purchase or sale of foreign currencies and conduct other transactions designed to encourage orderly exchange rates between U.S. currency and that of other nations. Read more about it at www.treas.gov/offices/ international-affairs/esf.