Rescue Plan Would Save Money Market Funds

Some investors started fleeing money market funds this week. Redemptions added to the strains on financial markets, and one fund went into the red. The Treasury Department has said it stands ready to guarantee the funds, a move that is expected to relieve stress on them.

MICHELE NORRIS, host:

If you're worried about your money-market fund, you can breathe a bit easier today. The Treasury Department announced its stands ready to guarantee these assets. Lots of Americans use the funds much like savings accounts. That's because they are supposed to be extremely safe. But as NPR's Chris Arnold reports, there was concerned that the safety of those funds might be changing with all the recent financial trouble.

CHRIS ARNOLD: In just a couple of days, mostly professional investors pulled out nearly three percents of all the money in money market funds. They were focusing on some funds that had exposure to the failed investment bank Lehman Brothers. The fear was that that could spread a panic among lots of people who invest in these funds. Jeremy Siegel is a professor of Finance at the Wharton School who's been watching us.

Professor JEREMY SIEGEL (Finance, Wharton School): I was scared on Wednesday when I saw, you know, it's almost a hundred billion dollars yanked from money market funds. This is a three and a half trillion dollar industry. If that had gone further you could have had a general liquidity crisis.

ARNOLD: That's because that big pile of money gets invested in all kinds of company bonds that help those companies keep running. The funds also invest in bank CDs, and if everybody tried to pull out their money at once, that could spark depression-style runs on banks, massive bank failures, all kinds of bad stuff. That's not happening. But the government clearly didn't want to even take a couple of steps down that scary road. President Bush.

President GEORGE W. BUSH: The Department of Treasury is acting to restore confidence in a key element of America's financial , money market mutual funds. In the past, government insurance was not available for these funds.

ARNOLD: But now it will be. The Treasury Department is putting 50 billion dollars on the line to be used if needed to prop up money market funds.

President BUSH: For every dollar invested in an insured fund, you'll be able to take a dollar out.

ARNOLD: Jeremy Siegel says the move was much needed to stop the meltdown on Wall Street from spreading and spooking average Americans.

Prof. SIEGEL: We absolutely need to, you know, back these up. I think they're going (unintelligible) power with bank deposits in what the people considered they're safe in secure assets. So that I think is one of the most important points of the new Paulson plan.

ARNOLD: In reality, people in the industry say very few funds are ever likely to need the government back stop. They say almost all were on very solid ground even in the midst of this financial crisis. Gus Sauter is chief investment officer at the giant mutual fund company Vanguard. He says, just a couple of funds this week ran into problems, one dipped into the red. But Sauter says those funds were for institutional investors.

Mr. GUS SAUTER (Chief Investment Officer, Vanguard): Those are different from the regular money market funds that an individual would invest in. Money market funds are very safe investments, that they're broadly diversified.

ARNOLD: Many hold a lot of super reliable U.S. treasuries. And in the sign that regular investors weren't getting too panicky yet, Sauter says people actually put more money into Vanguard money market funds this week. And that raises the question: How many funds will actually decide that they need the federal insurance because it's voluntary and they'd have to pay a fee for it.

Mr. SAUTER: Yeah, all the details are not out on the insurance program at this point. We'll still trying to digest what little information we have.

ARNOLD: So investors that are concerned might want to see if their money market fund is getting the insurance. But especially if things keep improving, Sauter says the insurance will be a safety net that probably never gets used. Chris Arnold, NPR News.

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