Fed to Lend Up to $540B to Backstop Money Market Mutual Funds

Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington, Monday, Oct. 20, 2008, before the House Budget Committee. (AP Photo/Lawrence Jackson) (Lawrence Jackson - AP)

By Neil Irwin

Washington Post Staff Writer
Tuesday, October 21, 2008; 10:33 AM

The Federal Reserve, continuing its expansive campaign to try to keep cash flowing through the financial system, unveiled a new program today that acts as a backstop to money market mutual funds.

In recent weeks, investors have been pulling money out of those mutual funds, which are normally viewed as nearly as safe as cash. But the funds have had trouble meeting investors' request to pull their money out because of problems in the debt markets. The Fed said this morning that it will lend up to $540 billion to new special entities that will stand ready to buy up that short-term debt from money market mutual funds.

The central bank is relying, as it has repeatedly this year, on a Depression-era authority that allows it to make emergency loans to almost any entity. The program, called the Money Market Investor Funding Facility, is meant to complement other programs that it has created in recent weeks to bring some stability to the markets for short-term debt. Commerical paper is both the funding source for much of corporate America's daily activity and a popular investment vehicle of choice for many pension funds, university endowments, and millions of ordinary Americans.

On Sept. 16, the Reserve Primary Fund, a $60 billion money market fund, announced it had "broke the buck," meaning that investors would be receiving back less than the $1 per share at which it usually trades. That, and the broad financial crisis, triggered a run on the $1.7 trillion money market fund industry, with jittery investors worldwide pulling their money out.

The Fed had taken previous steps to shore up that market, most notably accepting asset-backed mutual funds in exchange for short-term lending. Today's action goes further in trying to make sure money market mutual funds have the access to cash they need to meet redemption requests from investors.

The central bank will lend up to $540 billion to five different specially created entities, managed by J.P. Morgan Chase, that will buy up to $600 billion of commercial paper from money market mutual funds. The first $60 billion in any losses would be incurred by the mutual funds themselves, which offers the Fed some measure of protection against losses.