It doesn't look like things are getting any better for the banks.

"Citigroup Inc., Merrill Lynch & Co. and UBS AG may post further writedowns of $10 billion on their debt holdings after the two biggest bond insurers were stripped of their AAA rankings, according to Oppenheimer & Co. analyst Meredith Whitney."

Whitney correctly predicted that Citicorp would cut its dividend last October.

What does this mean? Pain from the credit crunch is still impacting financial institutions.

For those with too much money to run around and try to open FDIC-insured accounts at all of the highest-paying online savings accounts, money market accounts are the best way to protect your money. These funds are not foolproof and in a real economic crisis where the underlying assets decline in value dramatically or default, money market funds could and have lost value.

Currently, the best money market rates on this site are paying just under 3%.

I have a friend who is convinced that we are headed towards a credit crisis of epic proportions and who is willing to get a lower return by investing in so-called US government money market funds. These are money market funds that invest only in US government securities and therefore have all of their assets backed by the full faith and credit of the US government. They are presumably still safer than (or at least as safe as) municipal money market funds discussed on this website, but have a higher return (offset, at least to some degree, by the absence of the positive municipal tax attributes).

Currently, I understand that the the best rate of fthe US government money market funds is approximately 2%.

My friend recently discovered that these funds aren't as safe as he had thought when he opened the prospectus for a Western US government money market fund that he had invested in. It turned out that this fund, which was being hawked by certain large investment banking firms, has large exposure to government agencies such as Freddie Mac, Fannie Mae and even Sallie Mae.

Why get 2% return to take risk that is probably as great as those taken in a standard money market fund?

If you invest in a US government money market fund, you should be especially careful in the current environment to invest only in a fund that buys US Treasuries, not these risky agency bonds.

The tremors of the housing market and credit credit crisis hit another type of investment this week, the auction rate security market. The Wall Street Journal and several other business magazines have reported auction rate security failures for both Georgetown University and Nevada Power. On the surface, a failure in the $300 billion auction market sounds like a big problem. Is it?

Accrued Interest states that:

"Well, it turns out to not be a very big deal. Issuers will wind up having to pay a fee to their investment banker to refinance the debt, but that's manageable. Some issuers may use this occasion to call their variable rate debt and sell fixed rate debt instead, given that interest rates are low. Assuming the debt is indeed refinanced, the ARS holders who are currently "stuck" will get taken out when the bonds are called."

The comment thread that follows the article is equally instructive and demonstrates the confusion that even experienced traders and investment advisors have with auction rate securities. It appears that:

• Not all auction rate securities are backed by liquidity insurance. This means that you might be holding an auction rate security that you might not be able to sell. Some might have it and you'd have to check the specific of your auction rate security to know.
• Most of the payments and principal are protected. Most auction rate securities are issues by municipalities, colleges, or other institutions with high credit ratings. The vast majority are also backed by insurance which protects the principal and interest.
• If an auction fails, the rate on the ARS goes to the maximum, providing a nice return to holders. Some auction rates securities are resetting with yields as high as 12%.
• The issuer of the auction rate security is ultimately on the line to pay the 12% and they will not be happy. Most have call-provisions and look for them to call the bond if the auction market continues to fail. Thus, if there are above market returns, they shouldn't last long.

Be sure to check with a qualified professional before making any decision regarding auction rate securities.

Please visit the Auction Rate Security section for more information.