High-yield, Uninsured Money Market Accounts

[Moon Man]

According to the GM 2002 annual report, the company's retiree benefit plans, including pensions and health care, have unfounded liabilities of $ 61 billion, which is up from $ 34 billion in 1999.

[Guest yobob1]

Insurance! I want insurance!

 

Bull puckey. Insurance is merely another form of betting based on bell curves. An insurance company can sell billions in physical coverage while only having millions in assets. And normally it works just fine because what are the odds of more than a few percentage points worth of those physical assets having catastrophic losses at the same time or even within a short enough time frame to outpace reserves and immediate cash flow. In most cases pretty low.

 

It is the avoidance of such losses that prevents one insurance company from writing all the property coverage in an area like So. Florida. or Tornado Alley.

 

Over the life of my business I have paid out in excess of $300,000 in insurance (not including health insurance which would add another $150,000 +) In that same time frame my covered losses have been about $20,000 or less than 7% of the premium. The primary reason one has to be insured is not physical loss, but fear of lawsuits. So far, we've never been sued. Lawyers and insurance companies are symbiotic. If nobody had insurance, most lawyers would go the way of the dodo. Conversely if there were no lawyers the demand for insurance would decline dramatically.

 

Financial insurance on the other hand is a whole nuther cup of tea. The FDIC is the sole insurer of bank deposits. Insurers of bonds or other financial assets are relatively few in number and heavily leveraged. Financial insurance is a scam. In even a moderate economic melt-down it will fail because a few companies have all insured the same markets against the same disaster. Only a small percentage of the claims will be paid.

 

If someone wants to take the risk of parking their money in an account backed soley by one companies assets, that's their choice. Would it be nice if the prospectus read like this?:

 

You are depositing your money in an account that will earn "X"% interest based on the performance of our company. There is no diversity. There is a higher risk of a failure due to the lack of diversity and our companies inability to guarantee future performance. You could lose all your money. That's why we're willing to pay you more interest to get your deposit.

 

Yes it would be nice, but see your local lawyer as to why that will never be seen on any prospectus.

[machinehead]

If someone wants to take the risk of parking their money in an account backed soley by one companies assets, that's their choice.  Would it be nice if the prospectus read like this?:

 

You are depositing your money in an account that will earn "X"% interest based on the performance of our company.  There is no diversity.  There is a higher risk of a failure due to the lack of diversity and our companies inability to guarantee future performance.  You could lose all your money.  That's why we're willing to pay you more interest to get your deposit.

 

Yes it would be nice, but see your local lawyer as to why that will never be seen on any prospectus.

Even with lawyers out of the picture, there are two ways that failure risk could be handled. The pure libertarian theory is that every depositor would do his/her own analysis of the financial statements. Nobody here but us CPAs!

 

Well that's just silly. Americans value their leisure time, and aren't going to slave away with a green eyeshade over some boring balance sheet.

 

So the second solution is, pay an "expert" to do that financial statement analysis, and guarantee his work by insuring against losses. This is regularly done for municipal bond issues, even with a fairly sophisticated customer base, because it makes economic sense.

 

Another example in the news today is excess SIPC insurance. All brokers have $500,000 SIPC coverage. For customers with more than $500,000 in assets, the big wire houses had excess SIPC coverage to $10 million or more. So big investors didn't need to do the homework of analyzing their borker's financial statements.

 

Now the insurers have backed away from writing such coverage:

 

Excess SIPC: Gone With the Wind

 

It will be interesting to see how the market for private wealth management responds to this. Is everyone going to "go naked" now?

 

As you point out, the ability to insure financial risks has been exaggerated. Central banks suppress risk in the early years of their existence. As their 'Greenspan puts' encourage the system to lever up, the likelihood of a correlated systemic collapse escalates. Presumably, the insurers are now reacting to that.

 

Nevertheless, until the point where the entire system melts down, insurance against the failure of individual deposit takers remains useful and socially desirable (for the sake of the system, as much as the depositors). In a market where most people understand "money market fund" to mean a low-risk product from a bank or mutual fund, it's deceptive for Ford to offer a "money market fund" that involves an order of magnitude higher risk.

[Auntie Septic]

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.

Interesting. I've been kicking around this same idea for some time

as I am up 100% due to a lucky exit of my Fido bubble funds.

 

If I were in Vegas, you betyerass I'd pull my original bankroll and

play with the house's money (I know it's really mine after I win,

but the point is to leave the table a winner.)

 

I'm out of all Fido bubble funds and rotting in the "Will Roger's Fund"

(aka Fido Retirement MMF). I'm maxing out my employer's match

for an effective 50% ROI. Will I see it? Who knows?

 

I think I'm gonna jerk my company's chain tomorrow and see if I

can get all MY money out.

[Bird D Durr]

Hopefully one puts their money in physical coins and buries it........................

 

If not..............major problemas.....................

 

Who knows what changes the tax code will bring.............Down The Road?...............

 

The gubbamit.............could legally just about do anything..................

 

Buy a safe.................for your backyards my friends........................

 

Fill it with gold & silver..................