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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

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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.

The salesman said his clients, the funds, were selling assets this week to meet the redemptions, but have slowed down as they try to understand the government's as yet undefined plan.

Not only that, many money market funds held

Lehman

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paper and have had to suffer writedowns. Lehman tried last weekend to find a merger partner, but when it couldn't, the investment bank filed for bankruptcy protection.

Meanwhile, other fund families were taking pains to list money market funds' exposure to various companies that have been worrying the market of late.

Fidelity

detailed its money market funds' exposure to

AIG

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,

Merrill Lynch

(MER)

,

Morgan Stanley

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and

Goldman Sachs

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in hopes of calming investors.

Columbia Cash Reserves Fund, a retail money market fund, said it held $400 million of Lehman securities. Columbia is a division of

Bank of America

(BAC) - Get Bank of America Corp Report

.

Wachovia

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stepped in to help its Evergreen money market funds, stating that "a decline in the value of the Lehman debt will not result in a decrease in the net asset value of the Evergreen money market funds." One Evergreen fund had a $300 million exposure to Lehman.

The Treasury Department said concerns about the net asset value of money market funds falling below $1 have "exacerbated global financial market turmoil and caused severe liquidity strains in world markets."

Putnam representative Sinead Martin couldn't comment on the government's fund plan, saying only that, "at this time, we are awaiting further details of the Treasury's new program to support the money-market mutual-fund sector."