Many Money Markets Yet to Apply for Insurance

With the Dow falling below 10,000, pulling money out of stocks and stashing it in money-market mutual funds would be a no-brainer in another era.

But today, uncertainty abounds everywhere. Trouble in money-market funds was likely the straw that broke the government's back and led to its massively unpopular Wall Street bailout. Money-market funds aren't supposed to lose money, but the credit crisis has shown that they indeed can. And the day money-market funds fail en masse is the day the financial world as we know it ends.

In hopes of avoiding that Armageddon, the Treasury Department is offering to temporarily insure money-market funds that want the guarantee and pay the requisite fee. Participation is voluntary, and only money on deposit as of Sept. 19 is covered. This isn't such a bad idea considering there's some $3.4 trillion in money-market funds as of Oct. 1, including $1.2 trillion in retail money-market funds representing countless Americans' savings as well as a crucial source of short-term financing in the markets.

But will the industry actually get on board? The deadline to do so is Wednesday, and mutual fund giants Fidelity, Vanguard  and T. Rowe Price (TROW) haven't yet confirmed their participation. Since they're generally considered the gold standard in the business, what should investors make of the fund companies that don't want the guarantee? Do they have troublesome holdings, or are they just being prudent? Invesco AIM, BlackRock (BLK), Charles Schwab (SCHW) and Putnam Investments are among the fund shops that have said they're getting the insurance.

None of these fund companies was especially chatty on the subject; all declined to comment about their deliberations on the insurance program. But so far, the information they've released on their money-market funds doesn't raise red flags. (See chart below.)

Yet keep in mind that Putnam recently had to shutter its $12.3 billion institutional Prime Money Market Fund after too many investors wanted their money out at once. Whether investors had real cause for concern isn't clear. The fund's shares were still worth $1 when it closed. Investors possibly just panicked in response to another fund, the Reserve Primary Money Market Fund, one of the oldest and largest, "breaking the buck," meaning its net asset value fell below the $1 threshold, something that's only happened one other time in the nearly 40-year history of money-market funds. (That was in 1994.) But, the Reserve Primary Fund held bonds from now bankrupt Lehman Brothers. None of the major fund companies we spoke with have Lehman exposure, although T.Rowe owned small positions in Lehman securities that it sold when Lehman declared bankruptcy.

Bottom line? Fund companies that get the insurance don't necessarily need it because their portfolios are risky, but because they're hoping to avoid coming under redemption pressure from panicky investors. If bigger asset managers like Fidelity, Vanguard and T.Rowe sign on, it'll be more of an indication that scared shareholders want that guarantee. If the big guys don't join in, take it as a vote of confidence in both their funds and their ability to bail themselves out if need be.

"Even if you've been a prudent manger and believe you don't have assets at risk, we're sort of in uncharted territory," says Niels Holch, executive director of the Coalition of Mutual Fund Investors, an advocacy group. Holch adds that, "There is a concern that if a lot of funds don't participate, the question is will Treasury have to go back to the drawing board."

After the bailout fiasco, the last thing any investor should want is for Treasury to go back to its drawing board. But if enough investors flee even the supposed safe harbor of money-market mutual funds, anything is possible.