Government to insure assets in money market funds

— -- The government's emergency plan to stop a run on money market funds stands to stem the panic for now, but raises serious questions that will change the way investors handle their savings.

Friday the Federal Reserve and Treasury announced separate but complementary moves to shore up what was turning into a exodus from the $3.4 trillion pool of money market funds.

The Fed said it would lend money to banks, which would in turn buy securities from money market funds to provide them with the cash they may need to pay out to investors who want to redeem. Worries over the safety of money market funds led investors to pull out $49.3 billion on Thursday and $90 billion on Wednesday, says Peter Crane of Crane Data.

Meanwhile, the Treasury said it was tapping up to $50 billion to insure the holdings of any public money market mutual fund that chooses to participate in the plan. The insurance program is expected to last a year.

The historic moves by the government likely will quell panic hitting money funds, but also will dramatically change the way investors perceive the risk connected to certain savings vehicles. They also may change fees, yields and the competition between banks and money market fund providers.

"This is a game changer," says Michael Holland of Holland & Co.

Major issues surrounding the move include:

•The limits of the protection and who is eligible. Unlike the Federal Deposit Insurance Corp., which guarantees bank deposits up to $100,000 per depositor, the Treasury says its plan has no set limit at this point.

Since the plan covers money funds owned by both individual and large institutional investors, which implies the limit will be larger than $100,000, Crane says. Many institutional money funds have minimum deposits of $1 million and are used by giant companies and pensions. "$100,000 (in protection) isn't going to do much for IBM," he says.

•The cost. The Treasury's plan is voluntary and there will be a fee charged to funds that participate. Fees will likely be passed along to investors in the form of lower yields, says Brian Sack of Macroeconomic Advisors.