Many Massachusetts savings banks have additional insurance for deposit amounts above $100,000 from the Depositors Insurance Fund (DIF). All deposits held in member banks above $100,000 are insured in full by DIF. The location of the depositor or the branch does not impact the coverage. Thus, a resident of California that wants to open an account at a DIF member bank in Massachusetts is fully covered. Out-of-state branches of a participating Massachusetts bank are also covered.

DIF not a government program but instead a privately funded program to protect the soundness of Massachusetts banks. The DIF website states:

"The DIF has over $300 million in assets, plus an additional $100 million of reinsurance. During the recession of the early 1990s, the worst financial period in the history of the Massachusetts savings bank industry, the DIF paid out more than $50 million to protect over 6,500 depositors in 19 failed member banks. Yet the DIF emerged from this period financially stronger than before the recession began."

DIF reviews the financial statements of its member banks on a quarterly basis to ensure their soundness and is "examined annually by the Massachusetts Division of Banks and audited by an independent auditor."

A list of DIF banks is here.

Everyone at this point knows that Fannie Mae and Freddie Mac excercise a tremendous influence on the morgage market. But they also play a large role in generating returns for money market funds. One of the dangers of a collapse in either institution is that money market funds that invest in short term bonds from Fannie and Freddie could suffer losses. Such losses would significantly undermine the financial system.

Money market funds, unlike money market accounts, are not FDIC insured. They are short term investment vehicles and their money is invested in short term (typically less than 1 year) assets that are continued extremely safe - T-Bills, CDs, and Mortgage backed securities (generally bonds issues by Fannie and Freddie). Because the government has implicitly backed both insititutions, the bonds from Fannie and Freddie are considered almost as safe as T-Bills, which are backed by the US government.

Marketwatch reports that:

"Peter Crane of Crane Data, publisher of the Money Fund Intelligence newsletter, noted that paper issued by government agencies represents about 11% of the roughly $3.5 trillion held in money funds. Paper from Fannie and Freddie is roughly one-fifth of that government-related paper. In absolute terms, it's a huge amount of dollars, but it means that just 2% of the average money fund portfolio is tied up in Fannie and Freddie."

Of course, that's just an average. Some money market funds hold substantially more and some hold less. And even a 2% loss in a money market fund is unacceptable to an investor who expects that there money is completely safe.

For now, Money Market funds appear to be safe. As Peter Crane wrote on my previous post on money market funds: "But no retail investors has ever lost money in one [money market funds].

But, as we learned with Auction Rate Securities, it's always wise to understand what's in your portfolio. I personaly plan to take a look at my money market funds to see much exposure they have to Fannie, Freddie and other real estate related investments. Since I believe housing will come down further, I want to make sure I understand my risks.

Five days ago I reported that Bank of America's dividend was at 11% and that the stock might present a good buy. Did I listen to my own advice? No. Today, BofA was up more than 20%.

I wrote at the time:

"So who is an investor to believe? I personally think Bank of America is a pretty savvy operation and that they knew what they were buying with Countrywide. They probably were able to model a range of losses that they would experience with their porftolio and included that in their business projections. Surely, their data is more accurate than the models created by Wall Street bankers who have no first-hand experience with the mortgage markets.

I also believe that if you look at Bank of America's stock, it is back to its 2001 values. That means that all of the gains of the last seven years, the height of the mortgage and housing bubbles have been wiped out. I also think that's reasonable."

I still believe that. I expect a few more bumps in the road with financials. I don't think the mortgage or overall credit crisis is fully over. Maybe sixth or seventh inning and banks will take a few more hits. But I also believe that markets have priced most of this in. The near insolvency of Fannie and Freddie certainly lowered future expectations.

Is the BofA still a good buy? Maybe, but not as good as it was a week ago. I'm still kicking myself for not buying.