First, it was the banks. Now the Federal Reserve has come to the aid of money market funds as the government seeks to break the credit logjam that threatens the global economy.
A week after the government announced it would spend $250 billion to buy stakes in U.S. banks, the Fed stepped up yesterday to help money market funds that have been squeezed by worried investors demanding to cash out their holdings.
Under a new program, the Fed will help buy up to $540 billion in short-term debt, including certificates of deposit and commercial paper that expires in three months or less.
This type of debt has historically been used by money market funds seeking safe, conservative returns for their clients. But the recent turmoil has caused one prominent fund to fall below $1 a share, an extremely rare occurrence.
Since that fund "broke the buck," many money market funds have had trouble selling assets to meet redemption requests by customers.
The new program "should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments," the Fed said in the statement.
"Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households."
It was a move supported by Legg Mason Inc. Chief Executive Officer Mark R. Fetting, who said yesterday that the Baltimore company is interested in participating in the program. Separately, Legg has been shoring up some of its money market funds hurt by investments in soured mortgage-backed securities.
"We and other industry players have been working on things like this and this particular development, I think, will have a real impact on bringing a real catalyst to bringing more confidence in the market," Fetting said in a brief interview.
Fed officials said that about $500 billion has flowed out of prime money market funds since August as investors worried about their ability to redeem shares.
Of the total $3.45 trillion held in money market funds as of Friday, about $858 billion was in so-called "prime" money market funds - the type that typically invest in commercial paper - according to fund-tracking firm iMoneyNet.
Mutual fund managers, including Legg, also have seen skittish investors move money to Treasury funds that have lower yields. Fetting said yesterday that the federal government's latest move also could help restore investor confidence in prime money funds.
