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U.S. backing of money funds expiring

September 18, 2009|Tom Petruno

After today, money market mutual fund accounts no longer will have the backing of the U.S. Treasury. Uncle Sam is betting that fund investors won't care -- or won't notice.

The Treasury is allowing its year-old guarantee of money fund assets to expire, in one of the first big reversals of the government's involvement to stem the financial crisis.

The unprecedented guarantee was put in place a year ago after Reserve Fund, one of the nation's biggest money funds, suffered a run on assets because of losses tied to Lehman Bros. IOUs that it owned.

The government's move had the desired effect: After a record outflow of $120 billion in the week ended Sept. 23, fund assets quickly stabilized. Investors soon began adding more cash to the funds -- even though the Treasury's guarantee covered industry assets only as of Sept. 18.

The government made a profit on the backstop program, because the funds paid fees for the insurance, which was never tapped.

After hitting a record high of $3.85 trillion in January, money fund assets have gradually declined, reaching $3.45 trillion this week.

But analysts say the slide more likely is the result of investors' pulling cash to invest in riskier assets, such as stocks and bonds, than of worries about the expiring of the Treasury guarantee.


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