September 29, 2008 / 1:32 PM / 11 years ago

UPDATE 3-Treasury opens money market guarantee program

(Adds Bush memorandum)

By David Lawder

WASHINGTON, Sept 29 (Reuters) - The U.S. Treasury Department said on Monday its temporary guarantee program for up to $3.4 trillion in money market mutual fund assets held as of Sept. 19 was now in effect for a three-month period.

The Treasury said each fund regulated by the U.S. Securities and Exchange Commission that maintains a stable stock price of $1 can now decide whether to pay a fee to participate in the program.

Money market mutual fund shares acquired after Sept. 19, when the Treasury announced the plan, will not be guaranteed under the program.

To receive the government guarantee, participating money market mutual funds that had a net asset value of at least $0.9975 per share on Sept. 19 must pay a fee of 1 basis point per share to the Treasury.

Those with a net asset value below $0.995 on Sept. 19 are not eligible for the program, and those between $0.995 and $0.9975 on that date must pay a 1.5 basis-point fee.

The Treasury created the program to try to stem a massive run on about $3.4 trillion in money market mutual fund assets after the Reserve Primary FundREPXX.O — one of the oldest U.S. money market funds — fell below $1 per share — a phenomenon known as “breaking the buck.”

President George W. Bush authorized the Treasury on Monday to use money from the Exchange Stabilization Fund, which was created during the Great Depression to help stabilize the dollar. Treasury has said it planned to use some $50 billion.

According to the Investment Company Institute, the trade group for the mutual fund sector, assets in program-eligible funds regulated under section 2a-7 of the Investment Company Act of 1940 have steadily declined this month. They fell to $3.398 trillion on Sept. 24 from $3.413 trillion on Sept. 17 and $3.586 trillion on Sept. 3.

The Treasury program guarantees investors that their shares in a participating fund held on Sept. 19 will remain valued at $1 per share if the fund’s net asset value breaks the buck.

U.S. Treasury Secretary Henry Paulson will review the program after a three-month term to determine whether to extend it. Funds will have to pay an additional fee to renew their participation if the program is extended.

If he opts to continue it, Paulson may have to find another funding source. The final $700 billion financial bailout bill negotiated over the weekend requires that the Treasury reimburse the Exchange Stabilization Fund for any money used in the guarantee program. It is prohibited from using the fund for any future guarantee programs for the U.S. money market mutual fund industry.

“My hope is that we would not need it three months hence,” said Paul Schott Stevens, president of the Investment Company Institute. “Money market funds have always been historically deep and liquid. If that condition returns, as we hope and expect it will, there’ll be no need for a guarantee program.” (Reporting by David Lawder; Editing by Jan Paschal and Andre Grenon)

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