Personal Finance Blog By MoneyRates - January 2009
January 30, 2009
The money fund industry witnessed one of its biggest challenges ever last September when the Reserve Fund dropped their net asset value below $1 after absorbing losses on securities issued by Lehman Brothers. Heavy redemptions and worries about other high-profile funds brought money funds to the front pages of newspapers for perhaps the first time ever. The industry was calmed with the implementation of the temporary Treasury Guarantee Program, which federally guaranteed all money funds purchased before September 19, 2008 from companies participating in the program. After large companies like Fidelity, Vanguard, and Dreyfus were quick to pay the premiums and publicize the program, money funds were once again deemed "safe" by the financial media.
A new major challenge to the industry is how to overcome the low level of interest rates that exists in the United States after the Federal Reserve has dropped rates to close to zero. Companies offering money funds rely on a spread between what they earn on their portfolio and what they pay to investors. Fees and expenses, which can range from 0.2% to close to 1%, reduce the yield paid out on a money fund. Treasury-only funds, in which fund managers are limited from buying commercial paper or other securities to boost their yield, have been a particularly difficult challenge. With short-term Treasuries yielding below 1%, money fund companies are facing the tough choice of reducing their own fees or lowering the yields on their funds to below 1%. In fact, it is currently hard to find a Treasury-only money market fund which is taking new investors and paying a yield of over 0.5%. Right now taxable money funds are available with yield of between 1% and 1.5%, although the national average has moved below 1%. Yields are continuing to head lower as fund managers reinvest maturing securities at lower and lower rates. It is not inconceivable that by the summer of 2009 nearly all money funds will be yielding below 1%. Find a list of some of the higher yielding money funds at Money-Rates.com.
If your cash investment in money funds is considerable it may be worthwhile to compare the yields at different funds while there is still a variance in yield between different funds. Before investing remember that the federal guarantee on money funds is temporary and that not all companies are participating. Check the fund companies' website for further details on their participation.
January 27, 2009
The FDIC has proposed tightening the caps on the rates that can be paid on CDs, money market accounts, savings accounts, and checking accounts for banks that are categorized as "Less Than Well Capitalized". Instead of using Treasury yields for calculating the ceiling on deposit rates, the FDIC proposes using national rate averages. The intended consequence of the FDIC statutory reform is to prevent weak banks from soliciting a large number of deposits and thus exposing the FDIC to more insurance coverage if the bank was to then fail. The good news for savings investors is that less than 1% of all banks fall into the categorization of "Less Than Well Capitalized".
FDIC Press Release January 27, 2009:
The Board of Directors of the Federal Deposit Insurance Corporation today proposed for comment a regulatory change in the way the FDIC administers its statutory restrictions on the deposit interest rates paid by banks that are less than Well Capitalized.
Prompt Corrective Action requires the FDIC to prevent banks that are less than Well Capitalized from soliciting deposits at interest rates that significantly exceed prevailing rates. The FDIC's current regulation ties permissible interest rates paid by these banks on deposits solicited nationally to the comparable maturity Treasury yield, and ties permissible interest rates on deposits solicited locally to undefined prevailing local interest rates.
The proposed regulation would define nationally prevailing deposit rates as a direct calculation of those national averages, as computed and published by the FDIC based on data available to it. Reliance on the Treasury yields in the regulation would be discontinued. In recognition of the blurring of local deposit market boundaries brought about by the Internet and other innovations, the proposed regulation would also establish a presumption that locally prevailing deposit rates equal the national rates published by the FDIC. This presumption could be overturned by evidence presented by banks to the FDIC.
"This proposed regulation would bring much needed concreteness to the administration of these statutory interest rate restrictions," said FDIC Chairman Sheila Bair. "Our expectation is that this additional concreteness would result in lower deposit rates being paid by a number of banks that are less than Well Capitalized and closer adherence to the statute."
The proposed rule applies only to the small minority of banks that are less than well capitalized. As of third quarter 2008, there were 154 banks that reported being less than Well Capitalized, out of more than 8,300 banks nationwide.
January 22, 2009
National City Bank (now part of PNC Bank) is offering a money market savings account with a 2.50% APY guaranteed for 180 days for new funds that have not been on deposit at PNC Bank or National City Bank within the last 30 days. The minimum deposit to earn the 2.50% APY is $10,000. This deal give a depositor the rate guarantee of a CD with the liquidity of a money market account. Although the 2.50% APY may not be thoroughly exciting, the national average is well below 1% and bank experts are predicting deposit rates will continue to drift lower in 2009. A guaranteed 2.50% for six months on FDIC-insured funds may end up being a great deal.
National City Bank was offering a large number of money market and CD rate deals in 2007 and 2008 before the PNC Bank merger went through. By offering this deal on the old National City website, it looks PNC is going to keep bringing in new deposits with rate promotions under the National City banner. This is similar to how Bank of America continued using the Countrywide Bank website after their purchase of Countrywide Financial to offer higher rates to new depositors than current customers were receiving. It looks like current customer of PNC Bank could park their money in a different bank account for 30 days and then take advantage of the PNC - National City offer.
The offer is available online to residents of Indiana, Illinois, Kentucky, Michigan, Missouri, Ohio, Pennsylvania, and Wisconsin.
Posted in: Miscellaneous
January 20, 2009
President Obama has the friendship and counsel of value investor Warren Buffett who endorsed Obama early in the presidential campaign and is expected to remain active in giving the President's economic team advice.
Buffett, who through his company Berkshire Hathaway has investment in insurance companies, furniture companies, and large stakes in Coca-Cola and Wells Fargo Bank, has suffered major losses like most Americans. But unlike many Americans, Buffett has always adopted a value-based long-term investing approach and has in the past advocated maintaining 5% of investor's portfolios in cash or bank savings accounts.
January 18, 2009
The latest news from Citigroup Inc. is their deal with Morgan Stanley which combines their brokerage business which runs under the Smith Barney name and the wealth management business operated by Morgan Stanley. The deal brings Citi some much-needed cash, but won't let them escape from their sub-prime nightmare. Already as a recipient of TARP dollars Citigroup is in partnership with the government, but the overwhelming losses and writeoffs that the bank has absorbed has raised the issue of the FDIC forcing a closure. However despite the mega-losses many banking experts believe Citigroup is considered to big to fail by the financial sector and government regulators.Former FDIC-Chairman, Donald Powell, voiced his opinion in a recent interview on Bloomberg TV:
Powell seems convinced the answer is YES that Citigroup is too big to fail. So despite the 95% loss in stock value of one of the nation's largest banks, Citigroup may live to see a turnaround.