The Depositors Insurance Fund (DIF) was created in 1934 and, while independently operated, is monitored by the Massachusetts Division of Banks. It protects all deposit accounts (savings accounts, money markets and CDs) from individuals and corporations to $1 million dollars (or four times above and beyond the current FDIC insurance). For many years, DIF included all Massachusetts licensed banks as members, but there are banks licensed in Massachusetts that are not members. Radius Bank was never a DIF member (and LendingClub which acquired Radius Bank is not a member). Rockland Trust is not a member (and has acquired East Boston Savings Bank in November 2021 so deposits there are no longer covered). Cambridge Savings Bank, which owns Ivy Bank, also announced its intention to withdraw from DIF in 2021. Therefore, you should not assume that because a bank in licensed in Massachusetts that it is a DIF member. Rather, you should always look for the DIF logo next to the FDIC logo. If there is any uncertainty, you should check the DIF's member listing here.

According to DIF’s website, the Fund

DIF has approximately $500 million in assets. During the recession of the early 1990s, the worst financial period in the history of the Massachusetts savings bank industry, DIF paid out more than $50 million to protect over 6,500 depositors in 19 failed member banks. During the 2008 to 2011 banking crises, the DIF was not affected by the spate of bank failures as none of its members were among those banks that either failed or were seized by the FDIC. Funds in the Massachusetts DIF are highly regulated today by the Massachusetts Division of Banks, and the fund again has significant reserves on hand to cover failures of member banks.

In recent years, we have seen competitive online rates from at least four online banks that are owned by DIF member banks (BankFive Connect, Salem Five Connect, Norwood Bank, MutualOne Bank). Assuming the DIF website is correct that all depositors are covered regardless of their state of residency, a depositor who might otherwise be inclined to keep online savings accounts below the FDIC’s individual $250,000 insurance limit could now be covered for deposits up to $1 million in an online account with one of those banks.

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It however should be noted that some Massachusetts-based banks have had some customer service problems in the past, and they may not provide online banking interfaces or customer services comparable to Ally or Marcus. Salem Five Direct has bank fees that are excessive for online savings accounts and make it a less than desirable place to put cash that may be needed quickly and/or often. BankFive Connect has a website with nice pictures but relatively sophomoric customer service.

Depositors for whom FDIC limits are not an issue may find that it makes more sense to stick with well-recognized online banks and their superior customer services. Even many depositors with $2 million or so to deposit in online savings accounts may find that they can achieve their goals and stay within FDIC limits by distributing their money among several banks with outstanding customer service. However, depositors seeking to hold significantly larger amounts in online savings and money market accounts may find the protection they require from Massachusetts’ DIF insurance and deposit amounts above FDIC limits in one or more of these Massachusetts-based online savings and money market accounts.

I have discussed structured notes at some detail in earlier articles on this site, including this article which was published in 2011 when major banks began offering structured notes again in earnest following the 2008-2009 banking crisis and this article which was published in June 2013 when JP Morgan began to offer its 15 year dual hybrid structured note after a year long period in which long term interest rates were too low for it to fund these operations.

Structured notes are effectively unsecured bank debt with certain conditions that enable the bank to gross up the return that it is offering. Essentially, the bank is selling options against the capital it raises in order to fund a much higher return on the offering than where its unsecured debt might be trading. The return is also higher because the bank has an option to call the note at par quarterly after the first year. In short, I believe that structured notes often represent a good opportunity for investors to pick up yield by taking on negligible risks and I myself generally invest certain amounts of capital in these notes intending to hold them to maturity.

The JP Morgan notes, which it routinely issues and calls Hybrid Range Accrual Notes, only pay interest during those periods in which 6 month LIBOR rates remain between 0 and 6% and the S&P 500 falls by no more than 20% from its level at closing. My June article discussed the risks involved in these contingencies and the real risk that interest might not accrue for long periods while these notes are outstanding.

The most remarkable thing about the latest issue obviously is how much more interest JP Morgan Chase is prepared to give than when it issued the very same notes in June. The June notes, which were identical in term and in conditions, were offered at 6.50% (on closing the price was set at 6.65%). It is now clear that an investor would have been much better served to settle for 0.85% in a savings account for the last 2 and half months than to have locked into a 15 year note that is now trading around 90 cents on the dollar.

In an environment where the 10 year Treasury is now trading close to 3%, but will very likely be trading between 4 and 5% in a year, investors should be very careful before locking into structured notes, just as they should before locking into any bonds in a fast rising interest rate environment. While the opportunity to make 7.50% on a fixed income investment seems very attractive in the current low rate environment, my guess is that JP Morgan Chase and Morgan Stanley will very shortly be offering similar notes with coupons north of 8% and with conditions that are less likely to cause interest payments to be halted (such as a LIBOR period between 0 and 7% or 0 and 8%, instead of 0 to 6%).

Prudent investors will find that rising interest rate environments like this are a good time to hold cash and you will find the best rates on cash by clicking on the savings tab above.

Those seeking more information on this offering can find it under CUSIP 48126D6Z7.

Brokers at several large investment banks today began syndicating a 6.50% syndicated structured note that will close later this month. The note, which pays quarterly, is conditioned on (a) 6 month US LIBOR being greater than 0 and less than 6%, and (b) the S&P falling by no more than 25% from its close date of June 28, 2013. Interest will not accrue on those days where these conditions are not met. The notes have final maturity in 2028 and are callable in 5 years.

Bank-issued structured notes should not be viewed as an equivalent to placing money in a savings account or even in a CD. They are much more similar to a bond and can fit well in a portfolio designed to generate income with low risk. Ordinarily, structured notes provide much higher yield than you can otherwise obtain on a similar credit. The holder receives the higher coupon as consideration for assuming the risks of the payment conditions.

Under these circumstances, the holder of the notes is prepared to forego interest if the stock market should come down and remain dramatically below its current levels or if 6 month LIBOR were to spike dramatically above current levels.

6 month LIBOR, of course, is not likely to spike from its current exceptionally low levels to a level above 6% at any time in the near future, but it is very likely to head there at some point over the next 15 years. It was consistently above 6% in the late 1980s and early 1990s, and again in 1994 and 1995. It was also intermittently above 6% in 1998, in 1999 and in 2000. It approached but did not cross 6% in June of 2006. In a normalized environment, it could easily get to that level again, and in a very high interest rate environment these notes could easily be rendered free of any obligation for JP Morgan Chase to pay interest for long periods of time.

Therefore, these notes may play a role in a portfolio, but are not an alternative to cash. My advice is that investors put 10-20% of their non-equity liquid asset base that they cannot afford to lose in the highest quality (i.e., JP Morgan issued) structured notes and/or municipal bonds while long term interest rates have spiked up. This will serve as a partial hedge against savings and CD rates continuing at such a low level for a significant, continued period of time.

Those interested in this particular note should search CUSIP 48126DX61/US48126DX615.