Market market fund rates dropped to record lows this week driven by the drop in short term treasury yields. The top money market fund rate according to BestCashCow is the Vanguard Prime / MMF Investor paying a 7 day trailing yield of 1.64%. That's down from a top rate of 2.56% in June 2008 and 4.36% in January 2008.
The average seven-day yield on taxable money-market funds fell below 0.50 percent for the first time in history, to 0.48 percent for the week ending yesterday, according to data compiled by IMoneyNet of Westborough, Massachusetts. Tax-free and municipal money funds remained at an all-time low of 0.29 percent for the second week.
Money market funds, unlike money market accounts are not FDIC insured, although some money may be insured in the wake of the Fed's action to shore up money market funds. In September of 2008, the Fed announced it was backing money in money market funds that were deposited before September 19, 2008 for a period of one year.
Still, it's hard to get excited about money market funds at these low rates. Investors may want to consider savings and money market accounts that are paying over 2 percentage points more in interest and are FDIC insured up to $250,000 through December 31, 2009 and $100,000 after that.
President Obama may have the FDIC run a "bad bank" that will purchase the toxic assets from bank balance sheets. Sound familiar? But this bad bank doesn't solve the central issue, how to value thes toxic assets.
President Obama may have the FDIC run a "bad bank" that will purchase the toxic assets from bank balance sheets. The news is being reported in most financial publications.
Bloomberg writes:
"The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, two people familiar with the matter said. "
This is of course, TARP redux. The original TARP was supposed to do just that. Buy toxic assets and get them off bank balance sheets. It was abandoned because no one could figure out how to price these assets. The central pricing dilemma is this: price the assets to high and the banks are being subsidized at taxpayer expense. Price them too low and the banks aren't receiving any real benefit from the sale of the assets. Finding the middle ground is extremely difficult and no one has figured out how to do it.
Estimates put the cost of this plan at over $1 trillion. The FDIC is exploring issuing debt backed by the agency to pay for the cost. More debt, dubious outcomes - I don't know but I'm starting to wonder if it might be better to let these toxic assets sit and instead provide funding to banks that don't need to be bailed out.
While the headlines discuss the problems with the nation's biggest banks, many small community banks are doing great. Low borrowing costs and lack of competition from the big boys is helping the community bank grow quickly.
While the headlines discuss the problems with the nation's biggest banks, many small community banks are doing great. Low borrowing costs and lack of competition from the big boys is helping the community bank grow quickly.
Steven Syre of The Boston Globe discussed this in an article and singled out two banks in Massachusetts, Brookline Savings Bank and Hingham Institution for Savings. While the article discussed Massachusetts banks there are thousands of small banks across the country that are also benefiting. As he writes:
"Access to ultracheap money and fading competition from mortgage companies are proving to be powerful advantages for many smaller banks. "Things are going well, particularly in the context of the economy," says Brookline Bancorp's chief executive, Richard Chapman.
Smaller banks are earning an unusually wide spread between the cost of money to them and the rate at which they lend to customers. They can borrow money from the Federal Home Loan Bank of Boston at rates in the range of 2 percent and use it to fund loans earning as much as 4 percent or even 4.5 percent more."
These banks are stable and offer somewhat competitive rates. Brookline is offering a 12 month CD at 2.40% APY, which is 85 basis points below the top 1 year cd rate on the BestCashCow rate tables. Still, that's significantly higher than some of the rates of the big banks. Bank of America was offering a 12 month CD for only 2.10% APY. So, for many, community banks offer stability with an above average return.
