Gonzalez asks Fed to study money market fund risks.

WASHINGTON -- Responding to the liquidation last week of a money market mutual fund for community banks, House Banking Committee Chairman Henry B. Gonzalez has asked the Federal Reserve to examine the risks involved with these types of funds.

In a letter sent last Friday to Federal Reserve Board Chairman Alan Greenspan, the Texas Democrat reasserted his concerns about the safety of banks investing in derivatives.

"The recent collapse of Community Bankers U.S. Government Money Market Fund and numerous reports of cash infusions into bank-affiliated mutual funds raise concerns about the risks of such funds to the federal deposit insurance fund as well as to fund investors," Rep. Gonzalez wrote.

He asked the Fed to detail each instance of a bank holding company or affiliate infusing capital into a mutual fund to cover losses.

He also asked for a description of any regulatory actions that may have been taken in each case, with an explanation of whether the Fed is taking steps to ensure that the strength of holding companies is not compromised by having to pump money into funds.

However, some industry insiders believe that Rep. Gonzalez is only scratching the surface of the issue.

"It's a natural concern, but the congressman's questions don't go to the heart of the issue," said Edward Furash, president of Furash & Co., a bank management consulting firm. "He should be asking what the responsibility of the fund manager is to prevent a fund breaking the buck, whether the losses are caused by derivatives or other things.

"The real issue is: Do bank holding companies have a particular responsibility to make the funds whole because of their responsibility to maintain the image that mutual funds are safe?" he added.

The $82 million-asset community bank mutual fund to be liquidated will be the first to "break the buck," or drop in price below $1 per share, since the current money fund regulations took effect more than a decade ago. It will also be the first mutual fund to be liquidated because of derivatives losses.

The fund manager, Community Assets Management, Denver, was unable to raise the capital necessary to boost the per-share value back up to $1.

"These situations should be a warning to investors, to the banks affiliated with these mutual funds, and to the federal bank regulators that mutual funds that invested in exotic derivatives are not always as 'on top of the game' as they would have us believe," Rep. Gonzalez said. "These incidents explode the myth that mutual funds and money market funds are safe investments."

Rep. Gonzalez asked Mr. Greenspan to respond to the House Banking Committee by Oct. 14.

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