U.S. offers to insure money market mutual funds

Moving to halt a broad run on the funds, the U.S. Treasury on Friday offered as much as $50 billion in insurance coverage to protect the beleaguered, cash-like investments. The government said that for the next year it would insure the holdings of any retail or institutional fund that pays a fee to participate in the program.

Shareholders yanked cash from a wide range of money funds this week after Reserve Primary, a pioneer of the asset class, said Tuesday that losses on IOUs from failed banking firm Lehman Bros. Holdings Inc. led the fund to become the first in 14 years to "break the buck," or fall below the standard $1 per share value.

Net redemptions on Wednesday and Thursday left industry assets at $3.29 trillion, down 6.3% from a week earlier, according to IMoneyNet of Westborough, Mass. But the redemptions probably flattened Friday, said Peter Crane, president of Crane Data, another industry tracker.

"The industry is like the guy who has been in the desert for four days and just got a jug of water," Crane said. With credit markets in tatters, continuing or accelerating withdrawals might have "pushed several other funds to the ledge, or over it," he said.

Although other funds had yet to break the buck, Moody's Investors Service on Friday downgraded the Utendahl Institutional Money Market Fund after redemptions were halted and the board voted to liquidate assets. Putnam Funds said Thursday that it would close and liquidate a much larger fund because of a surge in investor redemptions.

Details of the insurance plan, including the fee scale and starting date for coverage, were still being finalized, said Treasury spokeswoman Jennifer Zuccarelli.

But she said coverage would apply to general purpose funds, with government and tax-free municipal funds excluded. And there probably will be no limit on the amount of coverage per account, Zuccarelli said.

The Treasury's announcement, along with emergency steps taken by the Federal Reserve aimed at stabilizing financial markets, were lauded by the mutual fund industry's main trade group.

The measures "should help free up trading in commercial paper and other key markets," said Paul Schott Stevens, president of the Investment Company Institute.