US no longer insures your money-market fund, but that’s good news

Withdrawing federal insurance is part of a broader exit strategy from the government's emergency supports for the economy, expected to gather steam this year.

Andrew Winning/AP/File
Treasury Secretary Tim Geithner. The Treasury announced Friday that it was withdrawing emergency insurance for money-market funds, a sign of improving confidence in the economy.

Savers take note: Your money-market fund is no longer insured by the US Treasury.

These mutual funds, which earn interest for millions of Americans in brokerage or 401(k) accounts, rarely run into financial trouble. Almost always, they are able to maintain a reliable value of $1 per share. "Almost" is the key word, though.

Last year, one of the original money-market funds, the Reserve Primary Fund, "broke the buck" because some of it had investments issued by a certain firm called Lehman Brothers. When that Wall Street giant collapsed, Reserve's share price fell a bit below a dollar.

In the panicked climate of last fall, concern about a broader "run" by money-market depositors caused the Treasury to step in with an unusual guarantee. Commercial banks have long been required to offer deposit insurance, covered by premiums they pay to the government. For the past year, many money-market accounts have enjoyed similar protection against losses.

The guarantees come to a stop Friday, however.

The Treasury is quietly ending the program, which was one of the emergency measures that most directly aided ordinary investors. The program insured as much as $3 trillion in money-market fund holdings, and earned about $1.2 billion in participation fees paid to the Treasury by money-market funds. Currently, assets of US money-market funds total about $3.5 trillion.

The change is a sign of improving confidence in credit markets. But it also means investors may want to take a peek at the holdings of the mutual funds that hold their cash. The funds often invest in short-term corporate debts that come due every few months. The short time horizons make the investments very safe.

But as the unexpected bankruptcy of Lehman brothers shows, ultra-safe does not mean impregnable. Analysts say it can be helpful to make sure your money fund isn't heavily exposed to just a few firms or industries.

The withdrawal of federal insurance represents part of a broader "exit strategy" from the government's emergency supports for the economy, which is expected to gather steam this year and next.

"As the risk of catastrophic failure of the financial system has receded, the need for some of the emergency programs put in place during the most acute phase of the crisis has receded as well," Treasury Secretary Tim Geithner said Friday in a statement regarding the change.

The Treasury statement said that maintaining confidence in the markets for such short-term debts was "critical to protecting the integrity and stability of the global financial system."

The program helped achieve that end. But the fact that it was needed means policymakers need to think about how to best avoid a repeat in the future.

For now, policymakers appear confident that the absence of federal insurance won't cause investors to flee the funds for safer bank savings accounts and the like. Many investors are shifting out of money funds simply because the interest rates are so low (nearly zero now) and the stock market has had growing appeal.

Still, the market-tracking firm Wrightson ICAP reports an extra uptick in depositor withdrawals from money funds as the Friday expiration drew near.


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