Not since the Savings and Loan crisis of the late 80’s and early 90’s has there been as much concern about the global banking and financial sector. Some of the transgressions of the savings and loan industry, namely the underwriting of high-risk commercial loans, have been repeated by lending institutions through the trading of sub-prime mortgage instruments. The aftermath of the S&L crisis found the dissolution of over 1,000 savings and loan institutions and a cost to taxpayers of over $124 billion.1 We will not know for a number of years what cost taxpayers will ultimately bear of the current financial crisis, but we do expect additional fallout.
Many clients with whom we have spoken have expressed concern over the safety and security of their cash assets, whether they are overseen by our firm or held with a bank or brokerage firm. While this letter in no way suggests that any particular financial institution is at risk, we wanted to review several options for clients and prospective clients.
Generally assets held in an account at a bank are liabilities of the respective financial institution. The FDIC rules on deposit insurance include a wide range of categories, from single accounts to various trusts and retirement accounts. Checking, savings and CDs are insured up to a total of $100,000 under the name of one person in a single bank. Each person listed in a joint account, including spouses and children, can have a total of $100,000 insured in all joint accounts. IRAs, Roth IRAs and self directed 401(k)s held in banks are insured up to a total of $250,000 per person, not per account. Insurance for retirement accounts is separate from the $100,000 insurance for other bank accounts, so someone could potentially have insurance up to $350,000 that would include $100,000 for regular accounts and $250,000 for retirement accounts held in a single bank. Each qualifying beneficiary of a living or family trust is insured up to $100,000. Corporate or partnership accounts are insured up to $100,000 and considered separate from personal accounts. These rules only cover FDIC-insured banks, which include federal or state-chartered banks. You should check with your financial institution for more specific details on FDIC coverage and the protection of your assets over and above the FDIC limits and coverage. For more information on FDIC insurance, you can go to www.fdic.gov.
An alternative to bank deposits are money market mutual funds. The holdings in all money market funds must not have a maturity longer than 13 months, with a weighted average maturity of the entire portfolio of 90 days or less. The portfolio cannot have more than 5% of the holdings in any one investment (most money market funds hold hundreds of short-term investments) and no more than 5% of the portfolio can be invested in illiquid securities.
There are many types of money market mutual funds, but we will review three of the primary types: treasury, traditional and municipal funds.
Treasury Money Market funds*- invest in short term debt instruments issued by the US Treasury. These funds seek to preserve a $1/share price and are redeemable like any mutual fund. Since the underlying investments are backed by the Treasury, they have the least amount of credit risk of any money market fund.
Traditional Money Market funds*- invest in short term borrowings of corporations, government agencies and finance companies, bank repurchase agreements, bank certificates of deposit. The quantity and quality of holdings vary among funds. Historically these funds have exhibited a stable $1/share price, however, this is not guaranteed. These funds are exposed to the diverse underlying credit quality and make-up of the portfolio, which as stated, varies among fund companies.
Municipal Money Market funds*- are short term debt obligations of state and local municipalities and special use facilities. These funds are backed by the municipalities’ ability to tax as well as specific revenue generating projects such as turnpike, port authority, hospitals and education. The interest is generally federal income tax free to shareholders, but may have AMT considerations. Speak with your tax advisor regarding potential AMT issues. Because the underlying investments are often supported by the taxing ability of the issuer, there has been very low default risk within short-term municipal investments. In general, we would consider these options only slightly more risky than government money market funds. Currently if you are in a high tax bracket, yields on municipal funds may be very favorable when compared to after-tax yields on treasury funds.
*An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Mutual funds are sold by prospectus, which is available from your registered representative. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about any mutual fund investment please obtain a prospectus and read it carefully before you invest. Investment return and principal value will fluctuate with changes in market conditions such that shares may be worth more or less than original cost when redeemed. Diversification cannot eliminate the risk of investment losses, and past mutual fund performance is not a guarantee of future results.
As a sidebar, it is interesting to note that the equity markets have moved quite significantly higher since the aforementioned S&L crisis. In the summer of 1990, at a time when many feel was the height of the S&L debacle, the Dow Jones Industrial Average traded around 3000.2 Today, even during the current financial difficulties, the Dow Jones Index is trading around 11,200, almost 4 times the value of 1990.
If you have concerns about your bank deposits, money market mutual funds allow you to spread your risk among a wide variety of short term debt obligations and still have liquid access to your cash holdings. For those who wish to learn more about money market funds and cash management alternatives, Provenance Wealth Advisors (PWA), an Affiliate of Berkowitz Dick Pollack & Brant offers a wide variety of money market options through registered representatives of Walnut Street Securities (member FINRA/SIPC). Neither Provenance Wealth Advisors nor Berkowitz Dick Pollack &Brant are affiliates of Walnut Street Securities. If you have interest in discussing the options, please feel free to contact your PWA or BDPB representative. Investment products are not FDIC insured and are not deposits or other obligations of or guaranteed by any bank, and are subject to risk, including the possible loss of principal
1Source: FDIC Banking Review. These numbers apply to losses incurred between 1986 and 1995, the most expensive phase of the crisis. See The Cost of the Savings and Loan Crisis: Truth and Consequences, Timothy Curry and Lynn Shibut, FDIC Banking Review, volume 13, no.2, December 2000. Various statistics on the number of thrift failures can also be generated using the FDICs Bank and Thrift Failure reports available through the FDIC web site on www.fdic.gov. 2Source: Dow Jones & Company.
L09081837 {exp0909][FL] |
