Fed, Treasury Aid Money Market Funds

Updated from 8:51 a.m. EDT.

The Federal Reserve said Friday it would extend non-recourse loans to depository institutions and bank holding companies to finance their purchases of high-quality, asset-backed commercial paper from money market funds to help them meet redemptions.

With the move, the Fed joins the Treasury Department in trying to restore confidence to a market generally regarded as being almost as safe as cash. The Treasury established a temporary guaranty program for U.S. money market funds, saying it would insure for the next year the holdings of any publicly offered eligible money market mutual fund -- both retail and institutional -- that pays a fee to participate in the program. Details on the fee haven't been disclosed yet.

Funds Fighting to Stay at a Buck

The development comes as Putnam Investments announced that it was closing and liquidating its Prime Money Market Fund, a $12 billion professional fund. The fund didn't have exposure to the recent troubled financial institutions, but instead suffered from "significant redemption pressure." In just one week, the Investment Company Institute, a trade group that works with funds, said assets in funds serving institutions dropped to $2.17 trillion, a decline of $173 billion.

Also this week, a money market fund from Reserve Management Company "broke the buck" when its net asset value dropped below one dollar. In a statement, the fund said that redemptions could face a seven-day delay and transactions from investors could not exceed $10,000.

Money market funds, according to one bond salesman, were experiencing what was akin to a run on a bank. "The companies are trying to shore up their funds with their own money as investors are trying to get out while they can," he said.