Money-Market Funds Get Help From Federal Reserve
In what’s become a juggling act on the part of the government to reinvigorate the frozen state of the credit markets, the Federal Reserve will now provide $540 billion in financing to help money-market mutual funds swamped by investor redemptions.
Following the collapse of Lehman Brothers in September, along with other major financial upsets, nervous investors have withdrawn some $500 billion from money-market funds. On Sept. 16, one of the first and biggest money-market funds - the $63 billion Reserve Primary Fund - broke the buck after the net asset value of its shares fell below $1.
The Fed’s latest move to shore up money-market funds - a $3.3 trillion industry - entails an initiative called the “Money Market Investor Funding Facility” which, as its name implies, will provide liquidity to money-market fund investors. As part of the program, JP Morgan Chase will run five special facilities, with the Federal Reserve Bank of New York lending the facilities 90% of the purchase price of the assets that they buy. Among the assets eligible for purchase are certificates of deposit and commercial paper issued by highly rated financial institutions that has 90 days or less remaining until the mat urity date is reached.
The Federal Reserve says the Money Market Investor Funding Facility will remain in place until at least April 30.
Meanwhile, in a Bloomberg Television interview, Jim Bianco, president of Bianco Research LLC, called the government’s effort to back securities purchases from money-market funds a sign “that policy makers are trying to prevent Great Depression II.”
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