12 replies to this topic

[OEXCHAOS]

Guys, It dawned on me to check all of our accounts for security purposes, as we've added a couple and have been active ourselves. I discovered that one of our personal accounts had inadvertently been placed into a standard money market account when we opened it recently. This is counter to my long-standing policy of ONLY using US Government or Treasury money markets and as such, I freaked. I have since corrected this. Folks, if you didn't know it, standard money market accounts are NOT guaranteed. They are only as safe as the issuers of the paper they hold. That means in the event of a major liquidity event, say related to a bank going under or a very large financial organization defaulting or a huge hedge fund blowing up, you could have trouble accessing your money or even getting it back at all. Is it likely that your money market fund will trade at less than $1? No. But as I peruse the annual report of my erstwhile money fund, I see that about 45% is what I determine to be "at some risk" of default in a 6 sigma event. Now, I don't know about you guys, but I don't put money into a money market account to get rich--I put it there for safety. I want 100% to be available to me to deploy at a moment's notice (short or long). If there's no upside, why would I want to reach for an addition few basis points and take risk with that money? And here's the thing, in my opinion, we're at more risk of a disaster than we have been in many, many years. I think that there's a very real risk of somebody big having a problem or having a major default on their hands or of some cascading debt problem that sends the repo market into chaos and perhaps driving some MM NAV's well below $1. I guarantee you that if it happens, we won't get any sort of hint or warning, either. You'll just wake up one morning and you won't be allowed to redeem your money market for a couple days, or perhaps you'll just have to take $0.9, or perhaps worse. My read is that we all ought to be very cognizant of the real risks and take action as is appropriate. We probably shouldn't panic over such a low likelihood event, but perhaps some redeployment of reserve capital may make sense for some of us.

[greenie]

Exactly the same thing I have been doing for last 3-4 days. Can you tell me, how our brokerage accounts are protected, or what to do to have that in proper order?

[Jnavin]

Excellent point. I switched clients from regular money market funds to the government-backed-only funds when I noticed the difference way back in 1983 -- back when money market funds were new and different. The difference in yields is small, but important.

[OEXCHAOS]

Exactly the same thing I have been doing for last 3-4 days.

Can you tell me, how our brokerage accounts are protected, or what to do to have that in proper order?

All brokerage accounts have lots of SIPC and private insurance protection. Still, if you have large cash balances, I'd put them in treasuries for maximum security. Treasuries are more marginable, too, if you need to do something. Otherwise, hold spare cash in Government money market funds and don't trust any broker too far, espcially small ones. Also, commodity brokers are different. Your capital is their capital. Don't sit on cash there. Wire it out.

Mark

[esther231]

Scary.

[Russ]

How about Interactive Brokers? They are both commodities and stocks. Heavily used by institutional and professional traders I understand.

Exactly the same thing I have been doing for last 3-4 days.

Can you tell me, how our brokerage accounts are protected, or what to do to have that in proper order?

All brokerage accounts have lots of SIPC and private insurance protection. Still, if you have large cash balances, I'd put them in treasuries for maximum security. Treasuries are more marginable, too, if you need to do something. Otherwise, hold spare cash in Government money market funds and don't trust any broker too far, espcially small ones. Also, commodity brokers are different. Your capital is their capital. Don't sit on cash there. Wire it out.

Mark

[LeroyB3]

SIPC covers an account up to $500,000 of which $100,000 can be cash. Best, LB

[spoo tooth]

My understading is that they hold funds in nothing but Treasury Bills. I'm worried anyway. Re: Interactive

Edited by spooky tooth, 14 March 2007 - 04:09 PM.

[SemiBizz]

What you guys worried? Is it TEOTAWKI time ??!! I am gettin sooo BOOOLISH reading this....

[OEXCHAOS]

Semi, This isn't about being Bearish on the market. This is about what could be making the market go down. That, and being rational about your risk and reward. Money market's don't pay you enough to take risk. They HAVE risk, too. It's not a highly probable even, but the reward differential between having that risk and not having it is small. Why would you give yourself one more thing to worry about? Anyone who thinks it can't happen again, especially in this derivatives heavy world is deluded. Will it? Probably not. But, what's the cost if I'm wrong? Nearly nil. Beer money on $100K of short-term reserves. Mark