Money Market Funds Bolstered

The $3,400bn money market funds which have been one of the latest targets of the credit crunch have been bolstered by two aggressive steps by the US government.

Up to $50bn of losses would be guaranteed by the US Treasury at least temporarily. “For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund — both retail and institutional — that pays a fee to participate in the program,” the Treasury said in a statement.

Separately the Federal Reserve, would expand its emergency lending program to help commercial banks finance the purchase of asset-backed securities from the funds.

A massive $170bn has been withdrawn in the last week. A number of funds have "broken the buck" or fallen below the standard net asset value of $! a share.

“This action should enhance market confidence and alleviate investors’ concerns about the ability for money market mutual funds to absorb a loss,” the Treasury statement said. “Investors in money market mutual funds with a net asset value that falls below $1 would be notified that their fund triggered the insurance program.”M

Putnam Closes Money Market Fund

Putnam Investments has closed a $15bn money market fund at short notice on Thursday. The move followed institutional investors pulling money out or “experienced significant redemption pressure”. A lack of exposure to financial funds such as Lehman Brothers had no effect.

Money-market funds have been seen as extremely safe and is worth $3,500bn. Putnam's move is the second such a move in two days.

Putnam said, ”Serious constraints on liquidity in money market instruments created the risk that in order to process redemptions, the fund would realize losses in selling its portfolio securities. In the face of these challenges, the trustees determined to close the fund to ensure equitable treatment of all fund shareholders.”

Federated Investors Try to Reassure

Federated Investors, Inc. (NYSE:FII) provides an update on the money market funds the firm manages.

In light of recent market conditions, Federated wants to assure its fund shareholders and clients that the firm's money market funds continue to be high-quality investment products designed for use by fiduciaries and other investors who have stringent requirements for safety and daily liquidity at par. While money market funds are not guaranteed, Federated remains confident in its ability to maintain a $1.00* net asset value (NAV) across the money market franchise as the firm has done for over thirty years.
Federated will continue to manage money market funds with an unrelenting focus on credit analysis, high credit standards and maintenance of minimal credit risk. To this end, Federated uses an internal, proprietary credit analysis process and has its own ratings function. The firm has developed its own sophisticated systems and technological tools to assist its credit analysts in performing these vital functions.

Please note the following regarding Federated's money market funds: Federated's money market funds have no exposure to Lehman Brothers Holdings, Inc., American International Group, Inc. or Washington Mutual.