Q & A

December 21st, 2011
Question: A few years ago, I remember hearing that money market funds were covered by FDIC protection just like certificates of deposit and savings accounts. Are money market funds still FDIC-insured?
Answer: The short answer is no, money market fundholders DO NOT have the same guarantees that holders of CDs, bank-based money market deposit accounts, and checking and savings accounts have.
But your memory serves you well because money market fund investors were accorded extra protections when the financial crisis evolved in 2008. At that time, a large money market mutual fund, the Reserve Primary Fund, “broke the buck,” meaning its holdings dropped in price, which in turn caused the fund’s net asset value to drop lower than $1. That event created panic selling among some holders of money market funds, prompting the Treasury Department to start a new program, similar to FDIC insurance, for money market funds.  Under the Treasury’s program, investors who owned money market funds before Sept. 19, 2008 (the date that the Treasury introduced the program) were guaranteed to be “made whole” if their funds’ net asset values dropped below $1.  The Treasury’s program expired a year later, however, meaning that the Treasury, FDIC, or any other entity do not insure the assets in money market mutual funds. Thus, in times like this, with a credit crisis in Europe simmering, money market fund investors should choose those money market mutual funds with “government” as part of their description which means the dominant portion of the portfolio is comprised of securities issues by the U.S. Government.

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