Treasury to prop up money market fund

The Treasury Department on Thursday said it is prepared to buy assets from a troubled money market mutual fund, part of an effort to prevent further disruptions to already fragile financial markets.

The department has agreed to be a buyer of last resort to assist in the liquidation of the Reserve Fund’s U.S. Government Fund due to “unique and extraordinary circumstances.”

Under the arrangement, the fund will have 45 days to find buyers for its assets. After that, the Treasury will step in and buy any remaining shares to ensure that each shareholder receives $1 for every share he or she owns.

The money to buy any shares will come from a temporary money market fund guarantee program, which was set up earlier this year and bankrolled by Treasury’s Exchange Stabilization Fund. The exchange fund was created in 1934 to provide support for the dollar.

The assets belonging to the Reserve Fund’s mutual fund are currently valued at $6.3 billion, including $231 million in cash, its officials said in a news release. A Treasury Department official estimated the government’s maximum potential exposure would be $5.6 billion.

“Because of this agreement, the Government Fund will be able to return all of the fund’s money to investors early next year,” said Bruce R. Bent, president of the Reserve Management Co. Inc., the fund’s adviser.

An earlier company statement valued the U.S. Government Fund’s assets at an estimated $10 billion as of Sept. 15, but the firm received investor orders to pull out about $6 billion over the next four days. Withdrawals had been suspended since Sept. 22.

When a fund sees a rush of redemption orders to pull out money, fund managers must sell assets - typically at a loss when it must be done quickly, especially amid the recent market turmoil.

Reserve Management’s Primary Fund “broke the buck” in September when its assets fell to 97 cents for each investor dollar after a soured Lehman Brothers investment triggered a rush of redemption orders from investors.

Treasury said it does not anticipate taking similar action for any other mutual funds. The department called its action on Thursday a response to a “unique situation.”

The Reserve Fund’s U.S. Government Fund was permitted to suspend share redemptions as of Sept. 17 under an order issued by the Securities and Exchange Commission, the department said.

No other funds in Treasury’s temporary guarantee program received a similar order, the department said. “Because of this, Treasury does not foresee a need to take similar actions with regard to any other funds participating in Treasury’s temporary guarantee program.”