Fear in money market sector easing after intervention

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The plumbing of the financial system, the day-to-day trading in short-term credit markets, doesn't work well. That has the money market mutual fund industry on edge.

These funds, perceived as substitutes for cash and nearly as safe as federally insured bank accounts, have been through a harrowing September and October.

It started with a money market mutual fund announcing that it was halting withdrawals and could not completely return investors' funds. Then came more than a $200 billion run on fund assets, as people rushed to get their money out of what suddenly appeared to be an unsafe corner of the market

Things are beginning to settle down, industry analyst say.

"It looks as if it's still a delicate situation, but the money markets in general have been recuperating," said Peter Crane, president of Crane Data, a money market research firm.

Crane says at least 20 parent companies of money market funds have pumped billions of dollars of cash into their funds. They had to after the subprime crisis began to explode, because almost overnight, money market funds couldn't sell securities tied to such troubled investment banks as Lehman Brothers and to risky mortgages.

Without government assistance, the money fund industry leaped into the crisis with private rescues, with loads of discussion on Web sites about the safety and underlying investments of fund and even by bailing each other out, as Federated Investors recently did for a Putname Investments fund.

Fidelity Investments, the behemoth that manages $440 billion in money market funds, now discloses the holdings of its funds daily to any customer who asks.

And, the U.S. Treasury last month set up a temporary insurance program that most major funds have joined to guarantees investors' funds. That's brought a lot of calm to the sector.

With insurance, and now with the government's attention to the economic crisis, consumers "shouldn't have any concerns," said Deborah Cunningham, who is in charge of money markets at Federated, which has $271 billion in money market funds.

The Federal Reserve has been trying to try to unclog the credit markets, where money market funds do the job of buying and selling very short term securities.

Money funds' goal is to provide investors a return while maintaining their share values at $1. They must, under the Investment Company Act of 1940, invest in credit-worthy debt securities that mature in no more than 13 months. .

That means a lot of short term trading in a very liquid market, a system that "flowed like water, that was like the air you breathe" in the words of Morningstar Fixed Income Investment Analyst Eric Jacobson. Until mid-September.

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A startling announcement came Sept. 15, when Reserve Management Corp. said it could not fully cash investors out of its Primary fund. It was, in industry language, "breaking the buck." That hadn't happened at any fund in 24 years.

Investors rushed to pull their money out. From an all-time high of $3.545 trillion on Sept. 9, money market investors withdrew $209 billion in the following two weeks. The situation has since stabilized, with three weeks of substantial inflows, according to tracker iMoneynet. But funds have been shaken. As of Oct. 14, total fund assets were at $3.446 trillion, still down $89.47 billion from the record high.

The Fed's first response was to make loans to banks so that they could buy commercial paper. Those are interest-paying, short-term obligations (for as little as two days) issued by businesses to finance their day-to-day operations. Money market funds are substantial buyers and sellers of commercial paper

Next, the Fed said it would start buying commercial paper directly from any U.S. issuer, starting Oct. 27.

The Fed's third effort, announced Oct. 21, is its most direct: The Fed will provide up to $540 billion in financing directly to money market mutual funds.

So is that it? Are money funds safe?

"The consumer doesn't really have much to worry about," says Morningstar's Jacobson.

The market, though, remains unsettled. Investors still aren't certain where all the risks are in the debt markets. And the question, Jacobson says, is "are the institutions and normal players willing and able to step up and buy and sell in the normal way they have for years?"

Investors will have to wait for an answer to that one.

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