High-yield, Uninsured Money Market Accounts

[machinehead]

Ford Credit is offering 3.15% yield on its Money Market accounts, for deposits of over $50K. You can write checks on your account.

 

The catch: it's not FDIC insured. If Ford goes under, you're just another commercial creditor.

 

Searching for yield in all the wrong places

 

You've got to admire the fertile criminal minds who concocted this scheme.

 

Ninety-nine percent of Americans believe that deposit-takers are government-licensed and required to offer deposit insurance as part of the package. I believed it myself before reading this article. The ability to write checks against the "Money Market" accounts (presumably settled through a licensed, insured bank) completes the illusion. That's what sets this apart from buying commercial paper through a brokerage account, where customers understand that the stuff they're buying is subject to credit risk.

 

Mutual fund "money market accounts" have been around for years, of course. But there's a huge difference: their assets are diversified among dozens, even hundreds, of issuers. If one tranche of Ford commercial paper defaults in your Fidelity money market account, that's only a small percentage of your account value. And up till now, mutual fund managements have chosen to reimburse such defaults out of their own pockets, so as not to "break the buck."

 

By contrast, on these Ford/GM/GE/Cat accounts, you're totally undiversified. You're in the same position as people who lost their retirement accounts because it was all invested in their employer's stock. This is a wholly unsuitable investment for individual savers putting large portions of their net worth into the obligations of a single company. It is prima facie inappropriate and wrong.

 

These accounts take us back to the pre-Depression days of uninsured deposits. What political influence and legal loopholes allowed this to happen? An acquaintance in NYC told me these accounts are highly popular among immigrant savers, many of whom recognize the blue-chip brand names of the sponsors, but don't realize they're uninsured.

 

WTF? Is this another Enron in the making, where the regulators will come riding into town on their white horses after all the money has been sucked up and sent to Special Purpose Entities in the Caymans? WTF?

[Guest yobob1]

These accounts take us back to the pre-Depression days of uninsured deposits. What political influence and legal loopholes allowed this to happen?

 

Insurance isn't going to make much difference in the event of a really big problem. The FDIC is simply another ponzi con game. It has never been tested, but I suspect it will be soon enough. I don't expect it to pass. The Ford (or anybody else) deal is simple. Want higher yield? Take some more risk. To me it is a simple risk/reward trade-off. I'm sure they can't or don't imply it to be insured. If people aren't smart enough to bother checking the facts and assume total safety, that's their problem. IMO it is not the job of the government to individually guarantee the safety of any investment. All the regulations and laws sure as hell didn't prevent people from paying $250 for JDSU. People will always find a way to display their financial ignorance even with Big Brother on watch.

[machinehead]

The Ford (or anybody else) deal is simple. Want higher yield? Take some more risk. To me it is a simple risk/reward trade-off. I'm sure they can't or don't imply it to be insured.

You're right on the fundamental issues. But taking our FDIC-created moral hazard world as a given, this seems to be a case of willful blindness by the regulators.

 

Up till now, you could invest in FDIC-insured bank money market accounts, or uninsured but diversified money market accounts offered by mutual funds.

 

Uninsured single-issuer money market accounts are a new twist. They are inherently unsuitable for small depositors, who shouldn't be betting their savings on an undiversified, uninsured investment.

 

The main point is that the regulators -- probably owing to political suasion -- seem willlfully blind to unsuitable investments, at the time when they could prevent harm. Even as they punish the Enron malefactors, they ignore what could be "the next Enron."

[Guest yobob1]

You're right on the fundamental issues. But taking our FDIC-created moral hazard world as a given, this seems to be a case of willful blindness by the regulators.

 

Up till now, you could invest in FDIC-insured bank money market accounts, or uninsured but diversified money market accounts offered by mutual funds.

 

Uninsured single-issuer money market accounts are a new twist. They are inherently unsuitable for small depositors, who shouldn't be betting their savings on an undiversified, uninsured investment.

 

The main point is that the regulators -- probably owing to political suasion -- seem willlfully blind to unsuitable investments, at the time when they could prevent harm. Even as they punish the Enron malefactors, they ignore what could be "the next Enron."

Should we have federal inspectors to make sure every bathtub in America is equipped with non-slip surafaces? Should we have a law preventing individuals from investing their entire nest egg in GE or Enron? Should we have regulations deciding how much house any person can afford?

 

Sorry I don't see the need for more regulations as they seem to only add more covers for the slime to hide underneath. I suspect the financial system would be more stable if their were no regulations and people recognizing this had to do due dilligence. In time only reputable operators would survive. Now crooks can operate with impunity (like Wall Street or the Fed) cloaked in the respectability of regulations.

 

I don't know which side of the tracks you hail from, but in my books $50K clearly takes this out of the J6P category of small investors. Anybody "parking" $50K ought to know damn well just what it is they are "investing". If they don't bother checking, tough titty.

 

Ed Bugos has an interesting article on banking, gold and money. Particularly the Scottish banking system of the late 1700's to mid 1800's is of interest. It is basically what I advocate. De-centralization. Not a bad model for government either.

 

Free Banking

[Bearbones]

The financial deregulation of the previous two decades increasingly allowed individuals more control over their own money. The problem is that the level of economic literacy in the population is very low. The concept of risk is not clearly understood.

Freedom is the right to exercise your own self-restraint as well as absorbing the consequences of your own actions. Our society has chosen to socialize financial risk (a mutual fund is nothing but a financial version of a collective farm) thus providing no impetus for educating oneself on economic matters.

It needs to be proven that the government can not solve all financial and economic problems. Only then will individuals accept responsibilty for their financial decisions.

To the buyers of these new money funds I would first teach some Latin.

Caveat Emptor!

[mjkst27]

I had a DemandNotes account when I worked for GM. At the time I opened the account in 1996, you had to be a GM/GMAC employee or an immediate relative to open such an account. Once Greeny took interest rates down in 2001, I started looking elsewhere (I knew the account was not FDIC insured), and eventually closed my account. It was a shame, the account always paid a nice premium to money market funds. You could write checks on the account as long as they were $250 or more.

 

Before I closed the account, GM started offering a small bonus to accountholders who referred others to open an account. Looks like by now they have it open to the public.

 

In the prospectus for my demand note, it said the funds were put towards the "general fund" of GMAC. In other words, backed by nothing and totally unsecured. You are nothing but a low level creditor.

[mjkst27]

Yobob, FYI - Murray Rothbard has a detailed discussion of Scottish Free Banking in his Mystery of Banking

[machinehead]

... in my books $50K clearly takes this out of the J6P category of small investors.

The 3.15% yield on over-$50K deposits was cited, but Ford and GMAC will let you open an account for $1,000. GE's minimum initial investment is $500 ? $250 if you add to your account every month. Caterpillar's minimum is $250. This is being marketed to nickel and dime savers.

 

I favor private insurance of deposit risk, for those who want protection. But in a world where many believe (due to existing government distortions) that all deposits are insured, these accounts are misleading.

 

My point is that the regulators -- by their own paternalistic premises which neither you nor I accept -- ought to be moving against these accounts. But they won't, until the money is already lost. Then they will posture as heroes, leading away the corporate criminals. Sort of a fractured morality tale. Don't believe a word of it.

[Goldilocks]

....

[Slothrop]

Ultimately, I agree with Yobob. Caveat emptor. The responsibility for one's money falls on oneself. "Free Banking in Britain" is a fascinating, thought-provoking work. I don't think it's available in Doc's bookstore, but last time I checked Amazon had it. Title is misleading: it's actually about free banking in Scotland.

[rog]

I agree with Yobo that the investor is responsible. However these are clearly securities and should carry all the paperwork that any other security requires. I went to the CAT site and so no mention of risk other than a small clause about no FDIC coverage. That is outrageous.

 

What are they selling exactly? Non-terminating demand-payable commercial paper. To fund what exactly? Why pay J6P 3% when 90 day paper is available at 1.25% or 1 year paper is less than 2.5%. Looks to me like J6P is funding the sewage that wont clear the minimal criteria used for ABS or CP these days.

 

You can't sell CP or ABS without: a statement of sources and proceeds, MD&A , full financials and an insurance wrap. Additionally a firm must provide 30,60,90 day updates on financial conditions and material breech of covenants. How can the SEC stand aside and allow the most junior, unsecured and zero recourse securities to be directly sold to J6P when the safest securities (CP) are only available to investors defined by the SEC as "sophisticated investors."

[Goldilocks]

....

[machinehead]

How can the SEC stand aside and allow the most junior, unsecured and zero recourse securities to be directly sold to J6P when the safest securities (CP) are only available to investors defined by the SEC as "sophisticated investors."

Thank you, rog! You made the point far better than I could, with your more detailed knowledge of the regulatory environment.

 

We're all libertarians at heart. But in the context of today's regulatory environment, these "money market funds" are misleading and abusive.

 

And if they manage to suck large amounts of deposits away from the bankster/borker/mutual fund complex, you will hear screams of protest in the political arena.

 

Philosophy aside, I'm flagging this issue because it seems important. All of you have been warned!

[DICK BUTTkus]

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?

[EasyAl]

I still remembered that GM and F lobbied White House to force SEC to change its requirement that no more than 5% of money market asset can be invested in below tier-1 commericial paper. The lobby was made shortly after September 11. I guess they did not succeed in that one.

 

Big threes' way of engagement is that if you are out of game, change the rules so that you are in the game again. Several years from now, I will not not be suprised that GM and F willl get relief from Congress and administration to reduce the retirement benefit for their retirees. For people taking lump sum, it is already happening (company will soon use cooporate bond yield to discount the present value, instead of 30 year T-bond).