High-yield, Uninsured Money Market Accounts

[machinehead]

MH & rog,

 

the lack of forthrightness is appalling, indeed.  But is it truly surprising given that all finance these days oozes from the venal casino created by Wall Street and sustained by the regulators who are in their pockets?   Hell, Uncle Sam himself is selling paper and promises left and right with no more to back them than his "full faith and credit."  That kinda sets the standard, doesn't it?

As is typical, the government exempts its own securities from SEC registration requirements, just as it exempts itself from the building code, labor regulations, and many other laws which it deems "good for others to follow."

 

Back in the bad old days when Treasuries were called "guaranteed confiscation certificates," somebody wrote a sham SEC registration for them, listing all the risk factors. It was pretty funny.

 

I'm not opposed to free banking. It's just that if GE, GM, Ford and Cat can be bankers, I want to be a banker too. The conditions for entry must be objective, not political.

 

What these guys are doing is free-riding on the safe reputation of the term "money market fund." Bank "money market funds" are insured. Those from mutual funds aren't insured, but they are diversified. These UNDIVERSIFIED funds present an order of magnitude more risk. Giving them the same name is grossly misleading.

 

These funds would be appropriate with private-sector insurance ... which shouldn't be that expensive, unless they are backed by the worst GARBAGE tranches, as rog speculated. Peddling uninsured risky securities to small savers with misleading terms is contemptible. I filed an SEC complaint against all four of them.

[megabear]

I've got money in a Fidelity Money Market Account that has no FDIC and there isn't a damn thing I can do about it. It's a company sponsored 401K. Fidelity gives you about 10 options of places the money is allowed to be invested. I had it in bonds up until a month ago and thanks to Richard Russell, I pulled it all out. But the only relatively safe place you can put it is the Fidelity Money Market, which is uninsured and pays crapola for interest. I hate it, but what can you do? Life's a big poker game and right now these SOB's have all the cards.

[mjkst27]

I've got money in a Fidelity Money Market Account that has no FDIC and there isn't a damn thing I can do about it. It's a company sponsored 401K. Fidelity gives you about 10 options of places the money is allowed to be invested. I had it in bonds up until a month ago and thanks to Richard Russell, I pulled it all out. But the only relatively safe place you can put it is the Fidelity Money Market, which is uninsured and pays crapola for interest. I hate it, but what can you do? Life's a big poker game and right now these SOB's have all the cards.

mega - sounds like your company has the identical Fido 401k plan as my company does. I made similar moves within it as you describe. Recently, I stopped contributing altogether, even foregoing the extra 4% of my salary that my employer was matching into the account. Why? With 40 years to go to retirement, I figure there will be no such concept by then. Retirement as an idea will not survive beyond 2020, IMO. Might as well take my money in hand now, pay the taxes, and see what I can do with it on my own given the full range of investment opportunities available outside a restricted plan.

[Bird D Durr]

mega - sounds like your company has the identical Fido 401k plan as my company does. I made similar moves within it as you describe. Recently, I stopped contributing altogether, even foregoing the extra 4% of my salary that my employer was matching into the account. Why? With 40 years to go to retirement, I figure there will be no such concept by then. Retirement as an idea will not survive beyond 2020, IMO. Might as well take my money in hand now, pay the taxes, and see what I can do with it on my own given the full range of investment opportunities available outside a restricted plan.

Amen.................

[Guest yobob1]

Amen.................

And pass the collection plate brother. I think given the funding shortfall of Social Insecurity and Medifraud that will be evident by the time you young whipper snappers retire, there is a distinct possibility of everything not nailed down being taxed like crazy. This of course assumes D.C. isn't obliterated by a massive asteroid (one can hope can't they?) or the Chinese haven't purchased the entire USA and we have all become coolies laying railroad tracks for them. Of course one of the things they will be doing is making the retirement age older and older as we move on. The good news is, by the time you're 65, you'll only have another 20 years to retirement!

 

I don't trust the tax defered status of anything. Pay the taxes now and have the freedom of choice.

[Sphinxter]

Recently, I stopped contributing altogether, even foregoing the extra 4% of my salary that my employer was matching into the account.

Hahahahahahaha!

 

That's exactly what I did. Screw the matching 4%. The 10 InFidelity funds they gave me access to were just different ways to lose my money.

 

Some looked faster than others, but otherwise indistinguishable.

 

I'm seriously considering the next step of eating the charge/penalty and going for early withdrawal.

 

From a tax planning perspective all my actions are a mess. I've taken some serious LT gains these past couple of years. My accountant keeps slapping his forehead and rolling his eyes. However, I can see him starting to have a glimmer of some other concern in his eyes beyond having a nutty client as I keep reinforcing the same basic ideas. Of course, the fact that the majority of my predictions have come true may have something to do with his newfound concern.

 

The one that may have him most concerned right now is my prediction of a decline in the housing market beginning by year-end with full on disaster by next year-end. I know, simple, obvious, non-rocket science stuff, but it's news to some folks.

[threadbare]

When uninsured money market funds are offered by a broker together with a basket of funds that are fdic insured, without explicit explanation that they're uninsured, this is deceptive business practise. The brokers and corporations know their uninsured product will be percieved as the opposite and build on that paradigm.

 

The blue chips issuing these funds are leaving themselves wide open to litigation. It isn't enough to include the facts in fine print, it has to be spelled out in bold lettering. There are plenty of precedents that insure law suits, if nothing else. I guess its a moot point though, and the blue chips understand that as well. If things get so bad they can't fullfill their obligations, and they go under, who the f' cares?

[mjkst27]

None of these companies themselves believe they are headed for bankruptcy, after all, they are all far too big to fail. Why would they therefore be concerned about being sued when they default on these uninsured accounts?

[Slothrop]

Then there's the question of whether FDIC insurance offers any real protection anyway...

[Sphinxter]

Then there's the question of whether FDIC insurance offers any real protection anyway...

Well, really Slothrop, let's not be dramatic.

 

After all the FDIC does hold up to, ummm, several percent of demand deposits .... in US Treasony Notes.

[joestool]

I have the Fidelity 401k plan too and recently tried to pull MY money out but I

have no recourse but to quit my job or be approved for a "hardship withdrawal".

I've already taken loans against it to diversify the money into other investments

and my hardship withdrawal application was denied.

 

I was under the impression I could pull my money out of the 401k any time I chose as long as I was willing to pay the taxes and 10% penalty but that appears not to be so.

To get MY money back, I'm going to have to find a way to get a hardship withdrawal approval past the plan administrator or find another job so I can roll it into an IRA and then take it out.

 

401k=another wallstreet SCAM

 

Oh, and while I'm at it, you ever notice how the 401k contribution comes out of your paycheque immediately, but it doesn't show up in your 401k account not until sometimes up to 10 days later? Those 5-10 days floats with free use of every 401k participant's money twice a month can really add up!

 

And how about those "matching funds" paid in company stock funny money...which even after it has been vested cannot be sold and moved within the fund.

 

And the non-insured MMF paying a $9 monthly dividend, but then charging back a $7.50 monthly fee.

 

And....

[machinehead]

I guess its a moot point though, and the blue chips understand that as well. If things get so bad they can't fullfill their obligations, and they go under, who the f' cares?

One of the lessons learned from Depression I was that widespread uninsured bank failures cause catastrophic knock-on effects. Canada rode out Depression I better than the U.S., because its fewer, larger banks didn't fail. The U.S. concluded that a banking system with insured accounts is far more robust against shocks to confidence. (The flawed implementation of deposit insurance by government entities is a different subject.)

 

Imagine that due to yield hunger, Ford/GM/GE/Cat grab 15% of total deposits, sucking them away from lower-yielding bank and mutual fund (diversified) money funds.

 

Then Ford goes under. Although GE/GM/Cat remain sound, their depositors try to liquidate too. All four suspend withdrawals from their "money market funds." Panic ensues. Fearing unlimited liability, their creditors cut off access to commercial paper, bank credit, and even vendor credit. The economy faces the largest multiple corporate implosion in history, with hundreds of suppliers at risk of being taken down with them.

 

As a matter of social policy, a large financial infrastructure erected on a base of uninsured public deposits is highly dangerous. If this paper is any good, it can be insured by Ambac, MBIA, or others, just as many bond issues are. If it's too trashy to be insurable, then it should be stamped out like cancer. Because in that case, it's an accident waiting to happen ... that WILL happen.

 

Unlicensed deposit taking -- often a front for Ponzi schemes -- is rigorously suppressed, for good reasons. Among others, it undermines the legitimate banking system. That is what Ford/GM/GE/Cat appear to be doing. It is astonishing that they are getting away with it. If the authorities don't act, I will conclude that the takeover of government by special interests is complete.

[mjkst27]

Unlicensed deposit taking -- often a front for Ponzi schemes -- is rigorously suppressed, for good reasons. Among others, it undermines the legitimate banking system. That is what Ford/GM/GE/Cat appear to be doing. It is astonishing that they are getting away with it. If the authorities don't act, I will conclude that the takeover of government by special interests is complete.

 

MH, you mentioned the "legitimate banking system"? Where might I find that?

 

Here's the GMAC Demand Notes prospectus. It spells out the risks and non-compliance pretty clearly in bold on the first page:

 

Light Reading

 

Something else to consider is that if GM were to lose this funding, they'd probably go under. What would they replace the funding with? As it stands, they'll probably go under anyway. The fact that honest unsuspecting people will get wiped out (I knew GM'ers that had 6 figures in this plan) is just further testament to how illogical our financial system is and how corrupt our politics is. This is where the real rot lies.

 

Edit: Here's a quote from last page of the prospectus, a section titled "Legal Opinion":

 

"The legality of the Demand Notes offered hereby will be passed upon by Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017.

 

The firm of Davis Polk & Wardwell acts as counsel to the Executive Compensation Committee of the Board of Directors of GM and has acted as counsel for GM and GMAC in various matters."

 

Nice

[Goldmember]

...and today on Crapvision Business Center, quite a few minutes of free exposure was dedicated to these very funds, Ford, GM, CAT and GE....with a little caveat at the end of the report stating they were uninsured...

 

....I'd say the special interest groups are rampant throughout the rotten system...

 

...Maybe Arnold runs for Pres in 2008 with a flame thrower in his arms aimed at special interest groups on a national scale.

 

...if there is anything left by then.

[machinehead]

Here's the GMAC Demand Notes prospectus. It spells out the risks and non-compliance pretty clearly in bold on the first page:

 

Light Reading

It reads like a typical money market fund prospectus from a mutual fund. Except that REAL money market funds have minimum rating requirements for commercial paper, and limits on the percentage of assets that can be invested in paper from any one issuer.

 

These demand notes are a totally different animal, with risk that's 10, 20 or 50 times higher than a diversified money market fund. Any responsible financial planner would tell you, this is unsuitable for small savers to invest any substantial portion of their net worth into ... because they would be putting all their eggs into one undiversified, uninsured basket.

 

Nothing requires GM to stop this program, even if it loses access to the commercial paper market. The investors have no leverage. GM proposes and disposes. Even the rate setting mechanism is obscure ... whatever crumbs GM deigns to sweep off its lordly table into the squawking little fledgling bird beaks of its chirping investors.

 

Without insurance, these demand notes are unsuitable for marketing to the general public. In a word, poison dogshit. If the regulators can't see that, they are either blind or bribed.

 

If you really want to see the 'end game' in American finance, let these industrial money market funds grow into bohemoths.