WASHINGTON — The Treasury Department and Federal Reserve Board announced actions early Friday designed to backstop money market mutual funds.
Treasury said it would establish a temporary facility to insure the holdings of any publicly offered money market mutual fund that pays a fee. Treasury said it would provide up to $50 billion to fund the facility.
The facility will be available only to certain funds that have strict requirements for diversification of assets and are judged highly credit worthy, the agency said.
Treasury's move is designed to ensure the net asset value of money market funds does not fall below $1.
"Maintenance of the standard $1 net asset value for money market mutual funds is important to investors," the Treasury said in a statement. "If the net asset value for a fund falls below $1, this undermines investor confidence. The program provides support to investors in funds that participate in the program and those funds will not 'break the buck.'"
A Treasury official who spoke on condition of anonymity said assets in non government money market mutual funds total $2 trillion.
President Bush authorized Treasury Secretary Henry Paulson to make the $50 billion funding available from the assets of the Exchange Stabilization Fund.
"Money market funds play a very important role as a savings and investment vehicle for many Americans and they are a fundamental source for our capital markets and financial institutions so maintaining confidence in the money market industry is critical to protecting the integrity and stability of the global financial system," the Treasury official said.
The Fed launched its own program on Friday to provide more liquidity for money market mutual funds by lending against nearly $300 billion of asset backed commercial paper and discount notes issued by Fannie Mae, Freddie Mac or the Federal Home Loan banks.
The majority of that, roughly $230 billion, is targeted at asset backed commercial paper held by money market mutual funds. Another $69 billion is tied up in short-term debt originated by the government-sponsored enterprises.
The Fed's move allows the money market mutual funds to sell these holdings and generate more liquidity.
Senior Fed officials said Friday they have become increasingly concerned about liquidity at the funds, which are typically viewed as low-risk entities but have seen investors redeem much of their holdings in recent days. The Fed officials said they were prompted to take action as spreads between the funds and Treasury securities widened.
The loans will be made through the discount window to bank holding companies before ultimately making their way to the money market mutual funds.
When the Fed opened the discount window to investment banks in March, it also began examining the institutions. But Fed officials did not say Friday whether their most recent actions would result in further regulation of money market mutual funds.
The move serves to further broaden the scope -- and risk -- of the discount window. The loans against asset backed commercial paper are non-recourse, meaning that if collateral fell beneath the value of the loans, the Fed would be left with the difference.
But the officials insisted the asset-backed commercial paper is a good asset and said they did not expect the central bank to post losses.
It does, however, mean that even more of the central bank's balance sheet will be dedicated to lending programs. Before the announcement, more than $400 billion of the Fed's $995.5 billion balance sheet was tied to liquidity facilities.
The Treasury has announced plans to backstop the Fed's balance sheet and the central bank officials said Friday they did not expect to be constrained by their book.