Bowing into pressure from banks and thrifts, the Department of the Treasury clarified its promise to guarantee money market mutual funds late Sunday. The government will insure money market mutual funds’ $1 net asset value for a year for investments in funds as of close of business last Friday.

 

Investments prior to, and subsequent from, Sept. 19 will not be guaranteed with $50 billion of the government’s money.

 

Treasury also said that tax-exempt municipal money market funds would be able to participate in the program, without penalizing their tax-free status, and that Treasury and the Internal Revenue Service will issue further details on the program and what documentation fund companies will need to participate in it.

 

Bankers praised the move, as they feared retail and institutional investors would potentially move billions of dollars money out of checking and savings accounts with $100,000 Federal Deposit Insurance Corp. into federally guaranteed money market funds without such a cap.

 

“The ability of banks to attract and keep deposits is being compromised in a profound fashion,” said American Bankers Association President and CEO Edward L. Yingling. “Our bankers are, understandably, very upset by the action.” What comparable regulations and fees, Yingling asked, would guaranteed money market funds be subjected to, as banks have been.

 

The Sept. 19 clarification on the guarantee leaves investors in The Reserve’s Primary Fund out in the cold. The fund had $62 billion in assets as of last Monday morning, but upon news of to Lehman Brothers’ bankruptcy a week ago, Primary broke the buck at 97 cents Tuesday, Sept. 16. Since then, investors have asked for $60 billion in redemptions, The Reserve announced in a press release Friday.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.