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Personal Finance Blog By MoneyRates - August 2009

FDIC Rolls Out Red Carpet for Private Equity (sort of)

August 31, 2009

| MoneyRates.com Senior Financial Analyst, CFA

The FDIC recently loosened the rules for private equity investments in banks. In the near term, this shouldn't cause so much as a ripple of reaction from depositors -- people don't generally think about who owns their banks, they just want to know that their money is safe and how to get the best savings account rates. Still, it's something to keep in the back of your mind in case your bank is bought out by private equity investors some time in the future.

In essence, what the FDIC did was lower the reserve requirement for investors who buy banks from 15% to 10%. If lowering the reserve requirement makes you uncomfortable, then consider that the reserve requirement for banks buying other banks is only 5%.

The FDIC's goal is to attract capital to the banking industry. With all the bank failures over the past year, the FDIC is rapidly drawing down its insurance funds and fresh capital would ease this burden. It helps that a great deal of money has fled the stock market over the past year, and that U.S. savings rates are up, but investment capital would provide another leg under the stool.

What does this mean to you? There's no reason to believe that private equity money would make a bank less secure, or systematically cause CD rates and other bank terms to be any worse or better than before. However, if you depend heavily on your bank for personal service, you might see a change if private equity investors start enforcing a cost-cutting regime. Still, don't judge until you see evidence for yourself -- in the meantime, having someone willing to invest in your bank is probably a good sign.

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FDIC Bad News Means What to Savings Investors

August 27, 2009

By Andrew Freiburghouse | Money Rates Columnist

News reports that the FDIC has endured a 20 percent drop in its insurance fund may cause concern among savings investors.

Some analysts are predicting that the FDIC will be in the red by the end of the year. What does that mean for savings investors?

Not a Whole Lot, In Terms of Individual Accounts

The first part of the answer to that question might be best summed up as: not a whole lot, you're safe.

The FDIC is so crucial to confidence in the banking industry that there is no scenario under which the U.S. government would allow FDIC insurance to "run out" in a way that cost individual depositors their savings.

Insurance up to $250,000 per depositor per account--that's the FDIC promise and they're sticking to it.

FDIC Options If It Needs Money

The FDIC has two basic options if more banks fail and the FDIC therefore needs more money to cover depositors:

1. Borrow money from the U.S. Treasury.

2. Charge banks more fees to pay for FDIC insurance.

While it's certainly nice to have two options rather than no options, savings investors would rather not see either of these options exercised.

The borrowing option could be inflationary, and the more fees for banks option may lead to more fees being passed on to bank customers.

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Fate of Adjustable Rate Mortgages Shows a Lesson Learned

August 26, 2009

| MoneyRates.com Senior Financial Analyst, CFA

One of the interesting details about the weeklymortgage data released by the Mortgage Bankers Associaton is the breakdown of the data into different types of mortgage activity. For example, mortgage application activity was up overall this week, but it was led by refinance activity. This suggests that most people taking advantage of low interest rates are existing homeowners, rather than people moving into the housing market.

Another noteworthy little nugget was that adjustable rate mortgages (ARMs) represented just 6.5% of mortgage applications last week. That's quite a comedown; just three years ago, ARMs represented 26.8% of mortgage activity.

Of course, ARMs (especially the more exotic forms, involving balloon payments) have been featured prominently in stories about mortgage problems over the past year or so. In some cases, people used ARMs to get into houses they couldn't really afford with low initial payments, and then defaulted when payments adjusted upward.

So, does the low proportion of ARMs really mean people have gotten the message about that type of financing -- or is it simply a function of today's low interest rates? After all, ARMs are partly a hedge against mortgage rates falling, so why do that when rates are near their all-time lows?

Even if the low proportion of ARMs is a function of low interest rates rather than any permanent lesson, it still represents a positive development -- it's simply rational economic behavior under the circumstances.

And what about that remaining 6.5% still applying for ARMs? There's not necessarily anything wrong with that. ARMs still have a legitimate place, for people under special conditions who know what they are doing. That portion of the mortgage-buying population is probably much closer to today's 6.5% figure than the 26.8% who were applying for ARMs three years ago.

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CBO Deficit Figures Sky High, Bernanke Re-Hired by Obama

August 25, 2009

By Andrew Freiburghouse | Money Rates Columnist

The Congressional Budget Office now projects that the U.S. deficit will nearly double over the next ten years. Meanwhile, President Obama re-hired Fed Chairman Ben Bernanke for another term.

What do these related news items mean to savings investors looking to secure the best CD rates and the best savings account rates?

Assumptions

The CBO report on the deficit contrasts with the Obama Administration's estimates in a very public and potentially problematic way. The heart of this conflict lies in the assumptions each party is making.

Income taxes, for example. The CBO only uses figures derived from existing laws. Therefore, the Obama Administration's desire to let the Bush tax cuts expire in 2011 are not part of the CBO estimates.

Bernanke and Stability

Regarding Mr. Bernanke, the idea of another term, while unpopular in some circles, is all about promoting stability in the financial system. A change to the leadership of the Federal Reserve would have been, perhaps, the change that re-injured the proverbial camel's back.

The Bottom Line of Today's News for Savings Investors

For deposit account interest rate watchers, today's news was mixed. On the one hand, government profligacy and higher taxes are not good news.

On the other hand, Bernanke seems to want what savings investors need: solvent banks.

Posted in: Miscellaneous

Tagged in: Fed, interest rates

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Who's Watching Your Savings Account -- Debate Over Preemption May Decide

August 24, 2009

| MoneyRates.com Senior Financial Analyst, CFA

Amid all the discussion in Washington about financial reforms, there is an interesting debate going on over the subject of preemption. Preemption is a concept that is often applied to national regulatory legislation. What it basically means is that federal standards take precedence over -- or "preempt" -- any state standards with respect to the industry in question.

The idea is that this helps consumers by making sure people in every state are protected by regulatory standards, and it helps businesses by giving them one set of standards to work toward, rather than a patchwork of different state-by-state standards.

Now, some members of Congress, including House Financial Services Committee Chairman Barney Frank, want to eliminate preemption with respect to national bank legislation.

On the one hand, it could be argued that putting more emphasis on state-by-state regulation would increase the number of watchdogs protecting your savings account. On the other hand, this will complicate things for national banks and make it more expensive for them to operate -- and that means more fees and/or lower interest rates on savings accounts and other bank products.

This is a good subject for MoneyRates users to weigh in on. So what do you think? Would you feel more comfortable if your state government was given more latitude to apply its own regulatory standards to banks? Or do you feel the extra layer of regulatory oversight would not be worth the additional fees that could result? Let us know your opinion -- and if you feel strongly about it, you may want to let your representative in Congress know as well.

Posted in: Miscellaneous

Tagged in: savings account

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