September 30, 2008
Tuesday

Almost everybody knows there is risk in the stock market, a hard fact underscored by Monday's frightening plunge on Wall Street.

But with the financial crisis reaching epic proportions, people are starting to ask: How safe are my safe havens?

Here's a look at the most popular places people stash their cash: bank deposits, money funds and U.S. Treasury securities:

-- Money market funds:

On Monday, the Treasury Department announced details of its plan to offer temporary insurance to money market funds. The plan is designed to stop the mass exodus from money funds that started after the Reserve Primary Fund became only the second money fund in history to "break the buck," or fall below $1 per share, on Sept. 19.

Money funds try to maintain a stable $1 per share, meaning shareholders should always get back at least what they put in.

With this new, temporary insurance plan -- if a fund participates -- the government will guarantee that if the fund breaks the buck, shareholders will still get $1 per share for balances they had in the fund on Sept. 19.

The plan is not open to individuals; only a fund can apply. To participate, funds should apply by Oct. 8 and pay a fee equal to 0.01 percent of the number of shares outstanding on Sept. 19. Funds that broke the buck before Sept. 19 cannot participate.

The insurance will expire after three months unless the Treasury secretary decides to extend the program for up to nine more months.

There is no per-person limit on how much money will be insured, like there is with insured bank deposits.

Many large fund groups such as Vanguard and Fidelity Investments say they are still reviewing the plan but sought to reassure investors that their money funds are safe.

On its Web site, Fidelity says, "We can state unequivocally that Fidelity's money market funds and accounts continue to provide security and safety for our customers' cash investments." It says that protecting the $1-per-share price "has always been our No. 1 objective in managing these funds."

A few fund groups, including BlackRock, have said their money funds will participate in the guarantee program. Charles Schwab said all its money market funds will participate, except for its U.S. Dollar Liquid Assets Fund, which is not eligible because it is not a U.S.-based fund.

The Treasury is backing the program with a $50 billion exchange-stabilization fund that was created in 1934 and has been used for various emergencies.

To see if your fund is participating ask your fund company.

Kacy Gott of wealth-management firm Aspiriant says that until last week, his firm invested clients' cash in general-purpose and tax-free money market funds. Now it's in money funds that invest only in Treasury securities.

"We think you need to be appropriately compensated for risk. Suddenly, money markets have some element of risk," he says. "There should be zero tolerance for risk in cash investments."

Gott is not the only one who has made this move.

In the past two weeks, assets have been pouring out of general-purpose and tax-free money funds and into Treasury or government-only money funds.

As a result, the average yield on Treasury funds fell to 0.69 as of Sept. 23 from 1.10 on Sept. 16. General purpose funds were yielding 1.67 percent on Sept. 23, according to iMoneyNet.

On the other hand, average yields on tax-free money funds, which invest in short-term securities issued by state and local governments, have been soaring -- from 1.36 percent on Sept. 16. to 4.77 percent on Friday.

Ancel Martinez, a spokesman for American Century Investments, says tax-free yields are rising because fund managers are "preparing to accommodate possible redemption requests." To raise cash, fund managers are selling securities back to broker-dealers who create and market securities for municipalities. "To move the securities off their books for quarter-end reporting, they have raised rates" to attract new investors, he says.

On its Web site, Vanguard says, "These unusually high yields are simply a function of how the money market arena is reacting to events in the credit market right now ... These yields are not coming from lower-quality securities, nor are they related to problems with the creditworthiness of municipalities." Vanguard could not predict how long the high yields would last.

-- Insured deposits

Deposit accounts at banks and thrifts are insured, up to certain limits, by the Federal Deposit Insurance Corp. The same goes for accounts at credit unions that are members of the National Credit Union Association (not all are). Both agencies are backed by the full faith and credit of the U.S. government.

Although the failure of a large bank could wipe out the FDIC's $45 billion insurance fund, the government agency could replenish it by drawing on a line of credit with the U.S. Treasury, which eventually would be repaid through banking-industry assessments.

"People who are worried about FDIC insurance are worried about the wrong things. We've cleared out the two biggest institutions people were worried about and it hasn't cost the FDIC a dime," says Greg McBride, senior financial analyst with Bankrate.com.

The basic deposit limits at insured banks, thrifts and credit unions are $100,000 per person per institution for regular accounts and $250,000 for most retirement accounts. There are ways to get additional insurance at the same institution by opening different types of accounts.

Deposit insurance covers savings and checking accounts, certificates of deposit and money market deposit accounts. It does not cover investments sold through a bank such as stocks, bonds, annuities or mutual funds including money market mutual funds.

To make sure your bank or thrift deposits are insured, go to www4.fdic.gov/EDIE/ or call (877) 275-3342 toll free. For credit unions, use the NCUA Share Insurance Estimator at webapps.ncua.gov/ins/ or call (800) 755-1030.

McBride says that "if you don't need the money right away, top-yielding CDs offer the protection of the FDIC with yields that far outpace Treasurys. You can easily get 4 percent to 5 percent in a CD, depending on the maturity. Comparable Treasurys are paying 2 percent or less."

-- Treasury securities

For clients who want to protect a lot of money and don't want to open accounts at multiple banks, Peggy Cabaniss of HC Financial Advisors suggests buying Treasurys from the government by opening a Treasury Direct account at www.treasurydirect.gov. There is no fee to purchase and as long as you hold the securities to maturity, you will get your money back, assuming the federal government doesn't default or restructure its debt.

While still a remote possibility, it's not as inconceivable as it once was.

"We've called Treasury yields the risk-free rate of return. Maybe that's too strong" a word today," Aspiriant's Gott says. But "if Treasurys aren't safe, we're going to have a lot of other problems to deal with."

SitNews ©2008
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Ketchikan, Alaska

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