Bank trade groups and some of their members reacted bitterly Friday to the Treasury Department's plan to guarantee money market mutual funds, expressing concern that it ultimately would do more to undermine than help the financial services industry.
Chief among their complaints: Main Street banks are again being asked to pay for mistakes made by Wall Street heavyweights — this time in the form of higher rates on deposits to compete with money market funds.
"It's another blow to community banks," said Rick Willetts, the chairman and chief executive of the $980 million-asset Cooperative Bankshares Inc. in Wilmington, N.C.
"How wide are we going to cast the government safety net in the financial services industry, and what's the impact going to be on those of us who didn't cause the problem and aren't asking for any help?" he asked.
Though many details had yet to be disclosed, sources said the government guarantee on money market funds would mirror bank deposit insurance, meaning its ceiling would be $100,000 per account. Sources also said they expected the program to last just one year. Funds would have to pay a fee to participate, but the amount was not specified.
Both the American Bankers Association and the Independent Community Bankers of America immediately raised concerns.
"Simply put, the ability of a bank to attract and keep deposits is being compromised in a profound fashion," Edward L. Yingling, the ABA's president and chief executive officer, said in a letter Friday to Treasury Secretary Henry Paulson and Federal Reserve Chairman Benjamin Bernanke.
He asked whether the government would regulate money market funds to ensure their safety, how it would remove the guarantee after the temporary period without causing a severe market disruption, and how the move might affect small businesses if banks lost deposits and had to cut back on lending.
Camden Fine, the president and CEO of the ICBA, said in a letter to the Federal Deposit Insurance Corp. that the program would have "devastating" consequences for community banks.
"What end is served if Wall Street is saved and Main Street is brought down?" his letter asked.
Some community bankers said that they accept the Treasury move as necessary.
Leton L. Harding, the executive vice president at the $959 million-asset First Bancorp Inc. in Lebanon, Va., said the guarantee appears unfair. "But the caveat I would have is that, in these circumstances of economic upheaval, I want to be realistic. There are some things done in the short run that are not fair, but we all have to make sacrifices for the betterment of the economy."
Mike Hofmann, the president of the $273 million-asset Main Street Bank in Kingwood, Tex., said he does not mind that money market funds will get a backstop but believes it should be self-funded as the deposit insurance fund is.
"I don't oppose the concept," he said. "But taxpayers shouldn't be required to ante up."
Mr. Hofmann also said that the plan could encourage managers to take more risk, knowing their customers' principal is protected.
Several industry observers agreed the Treasury had to act.
Joe Garrett, a principal at the consulting firm Garrett, Watts & Co. in Berkeley, Calif., said that, if the Treasury had not moved to insure money funds, it would have had a "cascading effect" on banks across the country. "If people were to lose money in their money market mutual funds, the loss of confidence would ripple through this country, from JPMorgan Chase down to some little community bank in an agricultural area. I think it would have 1929-style psychological repercussions."
But those upset with the plan argued that it could cripple community banks and in turn hurt the economy.
Mr. Fine said that he is particularly angry that the money market funds would benefit from insurance without having had to pay any premiums. Community banks have paid more than $50 billion in premiums over the years, he said, and these premiums are about to skyrocket. "So let's suck deposits out of Main Street banks and give them to Wall Street banks gratis! Brilliant idea!" he said. "Just when liqudity is impossible for a community bank and a credit crunch is coming on Main Street."
Cooperative Bankshares' Mr. Willetts said that this blow comes on top of too many others lately.
Banks are already facing the need to write off investments in Fannie Mae and Freddie Mac, as well as higher deposit insurance premiums, he said. "Now there is the possibility of having to pay higher rates on money markets to compete with unregulated firms who essentially have a government guarantee as well. We would have to pay a rate comparable to what they're offering at a time when banks are being squeezed in every direction possible."
Art Johnson, the chairman and CEO of the $420 million-asset United Bank of Michigan in Grand Rapids, said he hopes policymakers will take a second look at the plan.
"While there may have been good policy reasons for the Treasury and others to decide they needed to prop up money market mutual funds, I think it's pretty clear that they didn't think about what all the unintended consequences may have been for community banks and the commercial banking system as a whole, and I would hope they would start addressing those unintended consequences in short order."