WASHINGTON (AP) -- The Treasury Department says it will tap into a Depression-era fund to provide guarantees for the nation's money market mutual funds while the Federal Reserve says it will expand its emergency lending program to help support the $2 trillion in assets of the funds.
Seeking to deal with a severe financial crisis, the Treasury and the Fed announced separate actions on Friday designed to bolster the huge money market mutual fund industry, which has come under stress in recent days.
The Fed said it expanding its emergency lending efforts to allow commercial banks to finance purchases of asset-backed paper from money market funds. The central bank should help the funds to meet demands for redemptions.
THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.
WASHINGTON (AP) -- The Treasury Department announced Friday it will tap into a Depression-era fund to provide guarantees for the nation's money market mutual funds.
Seeking to deal with a severe financial crisis, the department said that for the next year the U.S. Treasury will insure the holdings of eligible money market mutual funds.
The money to insure the mutual funds will come from the Treasury Department's Exchange Stabilization Fund which was created in 1934 to provide support for the dollar.
Fears were raised about the giant money market mutual fund industry earlier this week when Primary Fund announced that the value of its fund's assets had dropped to 97 cents for each $1 put in by investors, exposing them to losses.
This instance of "breaking the buck" marked only the second time since money market mutual funds were begun in the United States in 1970 that a fund couldn't assure clients of the full value of their investments.
President Bush has authorized Treasury Secretary Henry Paulson to use up to $50 billion from the Exchange Stabilization Fund to provide the guarantees, Treasury said in a statement.
"Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system," Treasury said in its statement.
Treasury said its decision to provide guarantees "should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss."
When the assets in a fund fall below the $1 redemption level, investors in that particular fund would receive a notification that their fund would be covered by the insurance program.
During the next year, Treasury said it will insure the holdings of publicly offered money market mutual funds including both retail and institutional funds.
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