Plan to aid money funds may alter how some save

ByABC News
September 22, 2008, 4:18 PM

— -- 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.