For decades, commercial banks paid premiums and faced strict regulations to put Federal Deposit Insurance Corp. stickers on their windows, indicating to customers that their deposits would be safe.
Friday, the U.S. Treasury promised unregulated money-market mutual funds up to $50 billion in protection against losses without their having to jump through the same hoops.
Bankers alleged the move was not only unfair but could have put them at huge risk, forcing the government to place limits on whom they would help.
“We heard reports of people actually moving money late Friday and Saturday from bank accounts to money-market funds,” said Don Childears, president of the Colorado Bankers Association.
With government protection against losses and a higher return than that available at banks, why not make the move?
Bankers were irate and worked over the weekend to install safeguards to protect the industry.
“They were paying higher rates because they were investing in higher-risk instruments,” said Bruce Alexander, president and chief executive of Vectra Bank Colorado.
Banks, in contrast, were limited in what investments they could place in their FDIC-insured money-market funds.
On Sunday night, the government limited its promised protection to investments in place before last Friday, removing any incentive to shift funds out of banks. The move alleviated the commercial banks’ concerns.
Though the situation has been resolved, the government faced a tough situation, said Greg McBride, a senior financial analyst with .
When investment bank Lehman Brothers went into bankruptcy Sept. 15, the commercial paper or short-term debt it issued became worthless.
The Reserve Management Corp., the nation’s oldest provider of money-market funds, held about $785 million of that devalued debt in its $62 billion Primary Reserve Fund. Although fund sponsors usually step in to prevent their money-market funds from handing investors a loss, in what is known as “breaking the buck,” Reserve Management didn’t.
That in turn triggered a run on that and other funds as investors raced for the doors. The $3.5 trillion industry is estimated to have seen $197 billion pulled out last week.
“A lot of that money would have likely ended up in banks,” McBride said.
Those forced sales further depressed asset prices, putting other funds at risk of losing money and forcing more redemptions.
Over the weekend, investment banks Morgan Stanley and Goldman Sachs announced they would convert to commercial-bank charters, allowing them to collect deposits and increasing competition among banks.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
