-- The government's plan to stop a run on money market funds is stemming the panic but raises questions on whether investors will change how they save.
To stop what was turning into an 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 cash they may need to pay out to investors. An estimated $200 billion left money market funds last week, says Peter Crane of Crane Data.
The Treasury Department said it would insure money market funds that join the plan by tapping up to $50 billion. Sunday, Treasury said the insurance would cover only amounts that shareholders had in the money funds as of the close of business Friday.
The historic moves likely will quell panic that's hitting money funds but may also change the way some savers perceive the risk of certain savings vehicles. Fees may rise, yields may fall, and the competition between banks and money market fund providers could intensify. "This is a game changer," says Michael Holland of Holland & Co. Major issues include:
•The limits of the protection and who is eligible. The Federal Deposit Insurance Corp. guarantees bank deposits up to $100,000 per depositor. The Treasury's plan could have a higher limit in many cases, since it covers money funds owned by individual and institutional investors. Both taxable and tax-exempt money funds are eligible.
Responding to complaints from banks that this change would put them at a competitive disadvantage for deposits, the Treasury said Sunday that the guarantees will only cover funds that were in the accounts as of last Friday.
The banking industry had complained that the new guarantees ran the risk of sparking withdrawals by their depositors, who might decide to transfer their bank deposits to money-market mutual funds. Both accounts now have government backing and the mutual funds would not have the $100,000 limit imposed on deposit insurance for banks.
•The cost. The Treasury's plan is voluntary, and funds will pay to participate. Fees will likely be passed along to investors in the form of lower yields, says Brian Sack of Macroeconomic Advisers. Treasury hasn't set the fee structure. Crane estimates the fee would be 0.05% or less. Bill Larkin of Cabot Money Management guesses 0.1% or less.
•Government's role in how the funds are managed going forward. It's unclear if funds that accept the insurance will face tougher rules. Crane says the government will want to hold the industry accountable: "Dad's going to be taking the keys away for a while," he says.
•Who will sign up. Given how nervous investors are, funds may need to buy insurance to compete, Crane says. Money fund providers Vanguard, Federated and Fidelity all say they are reviewing the plan. Savers who had been willing to accept lower yields from banks because of the safety of FDIC insurance now might consider money market funds because they assume they'd ultimately get bailed out, says Edward Yingling, CEO of the American Bankers Association.
Larkin doubts this. "There are bank people and other types always looking for (the) best opportunity."