Friday, September 18, 2009

Money market fund guarantee program ends today

Back at the peak of the financial crisis people were even starting to panic about supposedly ultra-safe money market mutual funds after one of them actually did the unthinkable and "broke the buck". In a successful effort to head off the panic, the U.S. Treasury instituted "a temporary guaranty program for the U.S. money market mutual fund industry" on September 19, 2008 which covered all balances at U.S. money market funds as of that date: "the U.S. Treasury will guarantee to investors that they will receive $1 for each money market fund share held as of close of business on September 19, 2008." That initial guarantee was scheduled to last through April 30, 2009, but was eventually extended "through September 18, 2009." That is today. So, after midnight tonight that guarantee program will no longer be in effect for your money market mutual funds.

Please note that this guarantee program is for money market mutual funds, not money market accounts or other savings account at banks which are FDIC-insured.

The good news is that despite many lingering problems and economic weakness, the overall financial system is in much better shape than a year ago. Also, the Federal Reserve has a temporary support program for commercial paper, which is a key component of most money market funds. And, just about everybody is much more carefully monitoring the quality and risk of assets purchased by money market funds. In fact, the incredibly small yields on money market funds are driven in large part by the refusal of virtually all money market funds to hold anything but very low risk assets, such as those covered by the Federal Reserve commercial paper program or of similar quality.

The bottom line is that money market funds are much safer than a year ago, even without a guarantee program. Besides, if we ever get another crisis comparable to (or worse than) that of a year ago, I am sure that the U.S. government would once again step in with a comparable temporary guarantee program.

I keep most of my idle cash in FDIC-insured bank savings accounts due to their much higher yield, but I do not lose any sleep about my remaining cash that is in Fidelity money market funds, either with the guarantee or with the prospect that the Treasury guarantee is "here today and gone tomorrow", literally.

-- Jack Krupansky


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