US money market funds aided

The US Treasury on Friday rushed to the aid of ailing money market funds, saying it would guarantee the holdings of funds as it attempted to prevent the spillover of the financial crisis to the $3,400bn (€2,360bn; £1,850bn) US business.

In establishing the temporary guarantee programme for the US money market mutual fund industry, the Treasury tapped the Exchange Stabilisation Fund, which was established by the Gold Reserve Act of 1934 in response to the Great Depression.

The move to shore up the fund is designed to allow the Treasury to insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the programme.

President George W. Bush approved the use of existing authorities by Henry Paulson, Treasury secretary, to make available the assets of the Exchange Stabilisation Fund for up to $50bn to guarantee the payment as necessary.

The act of 1934 authorises the secretary of the Treasury “to deal in gold, foreign exchange, and other instruments of credit and securities” consistent with the obligations of the US government in the International Monetary Fund to promote international financial stability.

The ESF consists of three types of assets: US dollars, foreign currencies and special drawing rights (SDR) and can therefore be used to purchase or sell foreign currencies, to hold US foreign exchange and SDR assets, and to provide financing to foreign governments. All operations of the ESF require the explicit authorisation of the secretary of the Treasury.

Mr Paulson’s office is responsible for the formul-ation and implementation of US international monetary and financial policy, including exchange market intervention policy. The ESF is designed specifically to help the secretary to carry out these responsibilities.

As amended in the late 1970s, the 1934 act provides in part that the Department of the Treasury has a stabilisation fund consistent with the obligations of the government in the IMF. It also ensures orderly exchange arrangements and an orderly system of exchange rates. The ESF, under the Treasury secretary, with the approval of the president, may deal in gold, foreign exchange and other instruments of credit and securities.

Money funds held more than $3,400bn in investor funds according to the most recent industry tally released on Thursday, down almost $170bn from the previous week.