US to assist money market funds
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art's2007
The US Treasury rushed to the aid of ailing money market funds yesterday, saying it would offer a blanket guarantee on these funds as it attempted to prevent the spillover of the financial -crisis to the $3,400bn sector.
The Federal Reserve announ-ced two further programmes to help these funds.
The US central bank said it would lend funds via intermediary banks of up to $230bn (£126bn) in return for high-quality asset-backed commercial paper collateral.
It would also take on up to $69bn of short-term bills issued by Fannie Mae and Freddie Mac and held by money market funds.
The Fed loans against the asset-backed paper are non-recourse loans, meaning the US central bank is taking on more risk than usual, because it does not have any claim on the other assets of the institution.
These extreme measures followed mounting fears that retail investors in the sector, which saw a $170bn decline in the week to Thursday, could be starting to panic and might withdraw funds on a large scale.
Fear of mass redemptions had already forced money market fund managers to try to dump assets in an effort to raise cash and free themselves of any apparently risky paper.
This in turn had helped push down the yield on short-term government bills to levels last seen half a -century ago, while pushing borrowing rates on even slightly riskier debt up -dramatically.
Traders worried that money market funds would abandon the asset-backed commercial paper market, leaving issuers unable to roll over funding for credit card receivables, car loans and the like.
Moreover, because all the funds were trying to get rid of the same types of asset at the same time, there was a danger of a "fire sale" that would push down prices and potentially force otherwise healthy funds to "break the buck", returning investors less than 100 cents in the dollar.
In establishing the temporary guarantee programme for the US money market mutual fund industry, the Treasury tapped the Exchange Stabilisation Fund, which was established by the Gold Reserve Act of 1934 in response to the Great Depression. Treasury will charge funds a fee to participate in the programme.
George W. Bush, the president, approved the use of existing authorities by Hank Paulson, the Treasury secretary, to make available the assets of the Exchange Stabilisation Fund for up to $50bn to guarantee the payment as necessary.
The Federal Reserve announ-ced two further programmes to help these funds.
The US central bank said it would lend funds via intermediary banks of up to $230bn (£126bn) in return for high-quality asset-backed commercial paper collateral.
It would also take on up to $69bn of short-term bills issued by Fannie Mae and Freddie Mac and held by money market funds.
The Fed loans against the asset-backed paper are non-recourse loans, meaning the US central bank is taking on more risk than usual, because it does not have any claim on the other assets of the institution.
These extreme measures followed mounting fears that retail investors in the sector, which saw a $170bn decline in the week to Thursday, could be starting to panic and might withdraw funds on a large scale.
Fear of mass redemptions had already forced money market fund managers to try to dump assets in an effort to raise cash and free themselves of any apparently risky paper.
This in turn had helped push down the yield on short-term government bills to levels last seen half a -century ago, while pushing borrowing rates on even slightly riskier debt up -dramatically.
Traders worried that money market funds would abandon the asset-backed commercial paper market, leaving issuers unable to roll over funding for credit card receivables, car loans and the like.
Moreover, because all the funds were trying to get rid of the same types of asset at the same time, there was a danger of a "fire sale" that would push down prices and potentially force otherwise healthy funds to "break the buck", returning investors less than 100 cents in the dollar.
In establishing the temporary guarantee programme for the US money market mutual fund industry, the Treasury tapped the Exchange Stabilisation Fund, which was established by the Gold Reserve Act of 1934 in response to the Great Depression. Treasury will charge funds a fee to participate in the programme.
George W. Bush, the president, approved the use of existing authorities by Hank Paulson, the Treasury secretary, to make available the assets of the Exchange Stabilisation Fund for up to $50bn to guarantee the payment as necessary.
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