A Safety Net for Investors in Money Funds

$50 Billion Insurance Plan
Covers Accounts as of Sept. 19,
If Fund Pays to Participate

The U.S. Treasury's $50 billion insurance plan for money-market mutual funds, unveiled Monday, lasts only for three months and covers investments made only through Sept. 19.

The effort aims to re-instill confidence in the $3.4 trillion money-fund industry -- a crucial cog in credit markets that broke down earlier this month. The Treasury program provides a financial backstop for investors in money funds that break the buck, or fall under the sacrosanct $1-per-share net asset value the funds seek to maintain.

Fund Checkup

How to monitor the health of a money- market fund:

• Go to the company's Web site to learn if your fund is signed up for the program.
• Check your fund's holdings at www.sec.gov under the Edgar section.
• Call the fund firm to check assets in the fund versus few days ago.

The measures should help stem the big outflows from money funds that began this month after the once-venerable Reserve Primary fund collapsed due to its debt holdings in failed Lehman Brothers Holdings Inc. and a surge of investor redemptions. That was followed by the liquidation of the $12.3 billion Putnam Prime Money Market Fund (Institutional).

Funds are continuing to struggle, as evidenced by the announcement Monday by Northern Trust Corp. that it's increasing its capital support levels for its funds by $321 million, to $550 million.

To qualify for the government insurance, publicly offered funds must agree to participate and pay a fee. Fees are essentially higher for those that are having more trouble maintaining a $1-per-share value. Funds with share values of $0.9975 or greater as of Sept. 19 pay an upfront fee of 0.01% of assets. Meanwhile, funds with values between $0.995 and $0.9975 will pay 0.015%. That's small enough so that a lot of fund firms are anticipated to join in, if only to reassure their investors.

The plan covers all shareholders, retail and institutional, domestic and foreign, who had accounts as of Sept. 19. Unlike the Federal Deposit Insurance Corp.'s guarantee of bank deposits of up to $100,000 per person, per insured institution, there is no cap on the money-fund coverage.

The program will remain in place until mid-December. After that, Treasury can decide whether it wants to continue with the plans. The latest the program can be extend to is September of next year.

Managers are currently evaluating the details, but odds are that many money funds will opt for the coverage. Legg Mason Inc., with $187 billion in money-fund assets earlier this month, said on Monday that it intends to participate. The firm has been updating retail clients through its Smith Barney brokers and contacting institutional clients via letters and conference calls. Wachovia Corp. unit Evergreen Investments, BlackRock Inc. and Federated Investors Inc. also say they plan to apply to participate in the program but are still reviewing the information. (One complication: Citigroup Inc. is taking over Wachovia and doesn't intend to keep Evergreen.)

The Treasury payouts will be triggered if a participating fund sees its NAV fall below $0.995 a share. (A fund can break the buck if a big holding goes sour or if it suffers a rash of investor redemptions.) But that means the fund must be liquidated within 30 days, unless the period is extended by the Treasury. Covered shareholders will in turn receive $1-per-covered-share upon liquidation.

Given the terms, the program "is really a last-gasp measure," says Jay G. Baris, a partner at Kramer Levin Naftalis & Frankel LLP in New York.

The guaranty fund would not cover any additional investments in a money fund after Sept 19. For instance, if a shareholder had 100 shares in the fund as of Sept. 19, and a week later adds another 50 shares, he or she is insured only for the initial 100 shares. For the remaining 50 shares, the investor would get the fund's net asset value upon liquidation. If the number of shares held by an investor fluctuates, the investor will be covered for either the shares held as of Sept. 19, or the amount at the time of guaranty payment, whichever is less. So, if the investor had 100 shares on Sept. 19, and subsequently sold 50 shares and later bought 25 shares, he or she will be insured for 75 shares.

Investors can identify whether a fund participates by calling fund companies. Money-fund boards of directors are tasked with evaluating whether their offerings should participate in the program. Individual investors can't sign up for the coverage on their own.

For individuals who want to measure their fund's health, finding out about its redemptions recently can be a challenge. One tactic is to call the fund's shareholder-service line and ask for its assets currently versus a week ago. Also, iMoneyNet lists on its Web site the largest 15 money-market funds available to individual investors. It shows their assets, and the list is updated every Wednesday. See it at www.imoneynet.com/retail-money-funds/largest-retail.aspx.

How to suss out what a fund is holding? Some large fund companies like Charles Schwab Corp., Fidelity Investments and OppenheimerFunds Inc. have been frequently publishing a list of their money-fund holdings, or have posted frequently asked questions on their Web site.

For instance, Fidelity has a Q & A on its Web site in which it discusses its investments in financial companies that have been in the news lately, including American International Group Inc., which was recently seized by the U.S. government. Fidelity money funds own some investments issued by two AIG units, and the company says it is "confident that these holdings will pay full principal at maturity."

Investors can also call the fund's shareholder-services group to ask if their money fund owns securities from a specific company. Alternately, look up the fund's ticker on the Securities and Exchange Commission's Edgar Web site at: www.sec.gov/edgar/searchedgar/mutualsearch.htm. However, this may show only dated holdings, because some funds post their holdings only once a quarter.

The insurance, paid for using the $50 billion Exchange Stabilization Fund established in 1934, is part of the government efforts to bail out the nation's financial system, which include the Treasury's attempts to push through Congress its $700 billion bailout plan.

The Treasury worked closely with the Investment Company Institute, a fund-industry group, to develop the program. The plan is limited to accounts through Sept. 19 partly because of "grave concerns" the ICI raised about money-fund transactions. Institutional investors, which account for almost two-thirds of money-fund assets, had been making massive shifts out of general-purpose funds and into safer government funds. The worry was that without such a cut-off date, investors could all flock back into prime funds again, which could destabilize money markets.

After big outflows earlier this month, money-fund flows seemed to return to positive territory last week overall, according to researcher iMoneyNet. Investors put in more than $50 billion last week. But that figure masks a troublesome trend. Investors last week pulled out $53 billion from prime funds -- they often have significant short-term corporate debt, like commercial paper, which businesses need to operate -- while putting in $110 billion into safer government funds. That has made the commercial-paper market very iffy and threatens economic growth.

Because the Treasury won't back funds that broke the buck before Sept. 19, the Reserve Primary fund -- whose Sept. 16 meltdown set off tremors throughout global finance -- will not qualify. Other Reserve funds, however, could be eligible. On Monday, the Reserve listed offerings like the Reserve U.S. Government fund and several municipal money-market funds that continue to maintain a $1-per-share value. A Reserve spokeswoman declined to comment.

The Treasury program doesn't include so-called enhanced-cash funds, which are short-term debt funds that resemble money funds. This means offerings like the Schwab YieldPlus fund, which is down 30% this year, will not be able to participate. Nor will the Reserve Yield Plus fund, another big offering from New York-based Reserve Management Co. that is also not technically a money-market fund.

It's unclear whether the program could make fund firms less willing to put in their own capital to support troubled money funds as they've been doing for the past year. Money funds, which grappled with problem debt like structured investment vehicles last year, now are assessing recent risks like the bankruptcy filing of Washington Mutual Inc. -- and its takeover by J.P. Morgan Chase.

Money funds also are getting help from the Federal Reserve, which has begun extending loans to banks to finance their purchases of asset-backed commercial paper, or ABCP, from money funds. That should help the funds, which have had trouble selling the paper, to meet redemptions. Many firms seem to be tapping the facility. In the first three days of last week, a whopping $72.7 billion was already lent out.