Treasury to Guarantee Money Market Funds

Treasury to Guarantee Money Market Funds

The AP has just released the following report. If it is true, it raises one important economic question - how $50 billion in Treasury assets can cover $3 trillion in new liabilities, and is the US government going to lose its credit rating between Fannie/Freddie and this?

WASHINGTON (AP) -- The Treasury Department says it will tap into a Depression-era fund to provide guarantees for the nation's money market mutual funds.

Seeking to deal with a severe financial crisis, the department said Friday that for the next year the U.S. Treasury will insure the holdings of eligible money market mutual funds.

The money to insure the mutual funds will come from the Treasury Department's Exchange Stabilization Fund which was created in 1934 to provide support for the dollar.

Treasury took the action to stabilize the giant money market mutual fund industry after fears were raised about their investments earlier this week when Primary Fund announced that the value of its fund's assets had dropped to 97 cents for each $1 put in by investors, exposing them to losses.

This instance of "breaking the buck" marked only the second time since money market mutual funds were begun in the United States in 1970 that a fund couldn't assure clients of the full value of their investments.

President Bush has authorized Treasury Secretary Henry Paulson to use up to $50 billion from the Exchange Stabilization Fund to provide the guarantees, Treasury said in a statement

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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