What is the Treasury Department's Program for Money Market Funds?
The U.S. Department of the Treasury's Temporary Guarantee Program for Money Market Funds was in force for one year from September 19, 2008 to September 18, 2009. This U.S. government-backed guarantee program effectively gave money market funds who signed up for it the same government guarantees as bank deposits.
This program was instituted by the Treasury Department at the height of the economic meltdown of 2008 and was designed to reassure investors and prevent depositor "runs" on money market funds that would further weaken the already highly dislocated credit markets.
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Money Market Funds
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Money market funds are investment vehicles offered by banks and brokerages that invest in short-term bonds and other very low risk financial instruments. Money market funds only pay a relatively low interest rate because they are considered a very safe investment. Because they are such a safe investment, money market funds are rarely insured. Only one money market fund has ever gone below below a $1 share value (the original investment amount), and even that fund paid 97 cents on the dollar after final liquidation.
Structure Of The Guarantee Program
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The U.S. Department of the Treasury's Temporary Guarantee Program for Money Market Funds was authorized by President George W. Bush and Treasury Secretary Henry Paulson. Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS issued guidance that confirms that participation in the temporary guarantee program will not be treated as a federal guarantee that in any way jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds. Funds were required to sign up for the program and pay fees to be eligible for the guarantees.
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Source Of Funds Backing The Guarantee Program
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President Bush authorized the use of the Exchange Stabilization Fund to provide monies to back the program. The Exchange Stabilization Fund was established by the Gold Reserve Act of 1934, and has almost $50 billion in assets. This Act allows the Secretary of the Treasury, with the approval of the President, "to deal in gold, foreign exchange, and other instruments of credit and securities" consistent with the commitments of the U.S. in the International Monetary Fund to promote international financial stability.
Rationale For The Guarantee Program
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The U.S. Department of the Treasury's Temporary Guarantee Program for Money Market Funds was the first time that money market funds had been backed by the government. This major step was taken because money market funds represent many trillions of dollars of short-term debt that is absolutely essential for the day-to-day operations of both businesses and local governments. When the credit crisis of 2008 threatened to spread from the mortgage sector to the money market sector the government had to step in to protect the overall credit markets.
Effect Of The Guarantee Program
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The U.S. Department of the Treasury's Temporary Guarantee Program for Money Market Funds was only in existence for one year, but it was well-timed and served its purpose, as it not only averted a possible depositor "run" on money market funds, but none of the money market funds that participated in the program ever had to access the guaranteed funds.
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References
- Photo Credit money money image by Valentin Mosichev from Fotolia.com
