MoneyRates Blog

People who hold their money in conservative investments such as CDs and money market accounts can be forgiven for not knowing the definition of every acronym the financial world and/or U.S. government invents. After all, these acronyms–TARP, TALF, MBS–fly fast and furious, and often don’t much affect deposit accounts.

One acronym that may more immediately impact deposit accounts is called “PPIP,” or the Public-Private Investment Program.

PPIP Could Help Banks Get Back to Health

The overall idea of PPIP is to provide banks with motivation to finally get rid of the those “toxic assets.” As of now, banks have been leery of doing so, simply because the prices investors are willing to pay for these assets is, well, toxic in and of itself.

Now, though, the government has stepped in, via PPIP, to reduce the risk of private investors in purchasing these assets. Essentially, the government provides cheap loans to and shares losses with private investors.

Large asset management companies such as the BlackRock and Fortress Investment Group are expected to be among the prime exploiters of this arrangement.

And This Means What to Depositors?

Usually, a clearing of toxic assets off the books of banks would increase capital available to lend. More lending usually means more demand for deposits, which usually means higher interest rates paid to depositors.

So far, PPIP looks like one small step in that direction.

The S&P/Case-Shiller housing data for April was released yesterday, and as much as some optimists tried to spin the numbers as showing a slowing of the downward trend, the fact is that housing prices have yet to show signs of recovery. For home shoppers buying for the long term though, that should be no reason to be deterred. Lower prices along with low mortgage rates make this one of the most affordable times in years to buy a home.

About those numbers: because the trailing twelve-month decline in composite home pries was, at 18.12%, not a record decline, the positive spin was that the downward trend was slowing. However, home prices so far in 2009 are on track to decline 21.11%, which would exceed 2008’s loss of 18.60%. In short, signs of stability are not yet here.

That’s bad news for anyone looking to sell a home these days, and also for people looking to refinance if it puts their homes under water. However, long-term home buyers should be focused primarily on one thing: how affordable is the monthly mortgage payment? With home prices down and mortgage rates still near their historic lows, this is an especially good time to lock in an affordable mortgage payment.

Given how quickly the housing market and mortgage rates move, it’s best for home buyers that true signs of optimisim have not yet arrived. Once they do, prices and rates will be headed up.

In past ages, describing the business model of a bank was simple: banks take deposits from savers, then make loans to borrowers.

In the brave new world of finance, though, the business models of banks, especially certain banks, has become much more complex.

Here are two areas of interest right now:

Banks Making Money by Trading (Yes, Including Derivatives)

Despite the warnings of Warren Buffett that derivatives are “weapons of mass financial destruction,” the banking industry continues to traffic in–and profit from–these complex financial instruments.

In fact, during the first quarter of 2009, banks coralled $9.8 billion in revenue from trading derivatives and cash instruments.

Banks Losing Money on Credit Cards

Meanwhile, banks are taking a beating on credit cards. In May of 2009, credit card default rates hit 10.1 percent. Experts forecast that default rates will rise above 11 percent during 2010.

Not a Cause for Panic, Just a Call to Be Aware

There is no compelling reason for a conservative depositor to pull money from a bank savings account or CD just because that particular bank is making money trading derivatives and losing money on consumer credit.

However, there is a compelling reason for depositors to learn about the business models of the institutions they trust to take care of their cash. It’s great to have FDIC insurance, but even better to never have to use it.