THE US Treasury yesterday rushed to help 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 $3,400 billion (€2,360 billion) US business.

In establishing the temporary guarantee programme for the US money market mutual fund industry, the Treasury tapped the Exchange Stabilisation Fund, 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.

US president George Bush approved the use of existing authorities by Treasury secretary Henry Paulson to make available the assets of the fund for up to $50 billion to guarantee the payment as necessary.

The Act 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 (IMF) to promote international financial stability.

The fund consists of three types of assets: 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 fund require Mr Paulson's explicit authorisation.

Mr Paulson's office is responsible for the formulation and implementation of US international monetary and financial policy, including exchange market intervention policy. The fund 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 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 fund, authorised by the Treasury secretary and with the approval of the president, may deal in gold, foreign exchange and other instruments of credit and securities.

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