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Thread: you may want to rethink that extra 1% money market interest rate ...

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    Banned Melonie's Avatar
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    Default you may want to rethink that extra 1% money market interest rate ...

    (snip)"from Doug Kass:

    As I recently warned, the next shoe to drop will be the fear and then actual losses in money market funds.

    In their grasping for yield, many money market funds — including BlackRock (BLK), Charles Schwab (SCHW) and Fidelity (FSBI) — attempted to enhanced their investment returns by purchasing low-quality debt instruments (collateralized debt obligations, continuous linked settlements, mortgage-backed securities, etc.). And many of those money market funds — like the hedge funds that invest in them (particularly futures funds, which typically keep large cash positions) — have yet to mark to market, or if they have, in certain cases have halted redemptions.

    Yep, that’s correct: Money market fund management companies have begun to halt redemptions. In fact, here is one example of a management company that has halted redemptions.

    Despite the protestations of bullish ostriches, their heads remain firmly entrenched in the sand. The credit backdrop is getting more and more murky. Resist those who suggest that there is value in the equity market; they may very well be right, but in this environment, the evolving credit risks don’t seem to justify the risks in longer-dated assets like equities."(snip)


    (snip)"Why does it matter? Because such money market instruments are heavily bought by money market funds (MMF's), those supposedly ultra-safe repositories of peoples' savings. Most Americans may not be aware of this, but several european "enhanced" MMF's (they go by names like "LIBOR Plus") have already experienced heavy losses due to asset-backed CP investments going sour. We're not talking 1-2% losses here, but double digit hits. One insurance company had to bail out its own fund."(snip)


    This is receiving zero mainstream publicity in the US media, but for a fact some of the higher interest rate paying European based money market funds have now LOST 10%+ of their depositors' principal ... and some of those European money market funds have also halted depositors from withdrawing their remaining money to avoid even larger losses of their depositor's principal which would result from forced sale of 'toxic' CDO's, MBS's etc which are owned by the money market fund to satisfy depositor's cash withdrawl demands. As referred to in the link, some US based money market funds may not be in much better shape than their European counterparts. I don't mean to be the purveyor of unjustified gloom and doom, BUT ...

    ~
    Last edited by Melonie; 08-14-2007 at 08:16 PM.

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    Featured Member Katherine's Avatar
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    Default Re: you may want to rethink that extra 1% money market interest rate ...

    Aren't money market accounts still FDIC insured?

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    Featured Member Katherine's Avatar
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    Default Re: you may want to rethink that extra 1% money market interest rate ...

    Or does the FDIC not matter anyway as it's the "federal" depository insurance whatever...

    Sophia_Starina = stripper goddess


    "Guys are so damn lame, the only way they can halfway make up for it is by opening their wallets."

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    Banned Melonie's Avatar
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    Default Re: you may want to rethink that extra 1% money market interest rate ...

    NO ... money market accounts are based on insurance company AIC's and GIC's, corporate paper, asset backed securities etc. They are not regulated in terms of permissible investments and required levels of reserves as banks are. Thus they are NOT FDIC insured.

    From a technical standpoint, when you put say $1000 into a money market fund, what you are actually doing is purchasing 1000 'securities' valued at $1 each. A year later, those same 1000 'securities' will hopefully be worth $1.05 each. But there is no guarantee that those 1000 'securities' won't decline in value to $0.95 each or less. The financial industry has skirted with this issue in the past, commonly referred to as 'breaking the buck'. In the past, financial institutions that operate money market funds have waived management fees and/or transferred in extra cash from other operations in order to make sure that the value of their company's money market 'securities' did not drop below $1 thus 'breaking the buck'.

    But there are no guarantees that financial institutions will choose to do the same thing today ... which the european money market funds have clearly chosen NOT to do. Also, lacking the reserve and liquidity regulations which apply to banks, money market funds can also suspend the ability of their 'securities' holders to redeem those 'securities' for cash ... which the european money market funds recently chose to do.

    Bottom line is that with bank accounts / CD's etc one dollar of depositor money is guaranteed to be one dollar of legal tender. However with money market funds one dollar of investor money translates into one 'security' ... which has a variable value as determined by the actual value of the fund's underlying investments, and by implication a variable value as determined by the willingness of other investors to make a bid on that 'security'. If, as recently happened with the european money market funds, the willingness of other investors to make a respectable bid on underlying securities such as CDO's and MBS' held by the money market fund is severely compromised, then the value of that nominal $1 money market 'security' can and did fall well below the $1 level ... which translates into a loss of principal for money market investors. And if, as also recently happened with european money market funds, the requests by investors to sell their 'securities' in exchange for cash money was forcing the money market fund to accept bids on those underlying CDO's and MBS's which were well below their nominal value, the fund managers can and did simply decide to stop allowing fund investors to cash out in order to avoid being forced to liquidate money market fund assets that few other investors wanted to buy, at bid prices nowhere near the nominal value of those assets.

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    Veteran Member Robertjordan's Avatar
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    Default Re: you may want to rethink that extra 1% money market interest rate ...

    Many money market accounts are FDIC insured just like a bank account up to $100,000. Many are however not insured. If you're concerned do some research. Actually it was easier for me to find FDIC insured money markets accounts than non-insured ones.

    Here are some that are FDIC insured:

    Capital One

    Metlife

    Amtrust

    Flagstar


    Here are some money market funds are not FDIC insured:

    Fidelity

    Charles Schwab

    I believe the difference is that we're mixing terms. Money market fund versus money market account. It seems that money market funds are not FDIC insured and money market accounts are FDIC insured.

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    Banned Melonie's Avatar
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    Default Re: you may want to rethink that extra 1% money market interest rate ...

    ^^^ Yes you are exactly correct ! My mistake for not picking up on the distinction in Katherine's question.

    There is a difference between money market accounts and money market funds. Typically the money market funds (which are NOT FDIC/NCUA insured) pay the 1% higher interest rate. Money market funds have been able to do this in the past because they invested in higher risk financial instruments which in turn paid higher interest to the fund. Those riskier financial instruments, however, are now starting to create problems.

    Typically, money market funds are offered by online brokers, whereas money market accounts are offered by banks (and credit unions). Also typically money market accounts offered by banks (and credit unions) pay an interest rate that is only marginally higher than the rates available on standard savings accounts at the same banks (and credit unions), a rate which is significantly lower than the interest rates offered by money market funds.

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