A Broke FDIC Expands Checking Account Insurance From $250,000 To Infinity

A few days ago, the FDIC, broke as ever, with a Deposit Insurance Fund that was well south of zero at last check, announced, with delightful irony, that it was expanding its insurance on non-interest bearing checking accounts from the current $250,000 to, well, infinity. As in there is no upper limit on how much the FDIC would insure - the fact that it has no money at the FDIC to begin with being completely irrelevant. That's right, the broke FDIC basically said that it would guarantee up to $480 billion currently sitting in US checking accounts between December 31, 2010 and December 31, 2012. Yet is this nothing less than another Volcker-inspired plan to get capital out of multi-trillion money market industry and into consumer hands via easily accessible transaction accounts, and to encourage spending on useless trinkets like iPads? This could very well be the case.

As many will recall, earlier this year the Group of 30, headed by Volcker, came out with a recommendation to allow money market to suspend redemption without prior notice. We, along with many others, speculated that this was merely an attempt to spook MM investors into stocks. Well, it succeeded... half way. Investors did indeed take out money from mutual funds, whose current after-fee 7-day simple yield on prime funds is just 7 bps. However, they then used that money to buy not stocks, but fixed income, instead focusing on such securities as Investment Grade bonds and Treasurys. As a result the much expected ramp in stocks never really occured, and it was up to the Fed and the HFT mafia to keep ramping stocks as ever more outflows exited dometic equity mutual funds.

This latest action by the FDIC, as Barclays' Joseph Abate speculates, is nothing less than a comparable attempt to get Americans to take out theyr cash from money market funds and, now that the whole equity investment avenue is closed, to put it into checking account instead, hoping that once the money is one step closer to the end consumer (as it will reside in non-interest bearing transaction accounts), and easier to withdraw, the psychological element will be one of spurring consumption. Yet will this latest scheme to impact mass consumer psychology work? If past experience is any indication, the desired outcome will once again fall well short of the actual.

More details from Joe Abate on this latest scheme by the FDIC:

The FDIC recently released details about the Dodd-Frank financial reform bill’s requirement to provide temporary unlimited deposit insurance coverage. Unlimited deposit insurance would apply only to non-interest-bearing transaction (checking) accounts. It would be provided to all depositary institutions – there would be no opt-in – and importantly, there will be no explicit charge to the banks for the extra insurance. That is, unlike the similar Transaction Account Guarantee (TAG) program, there would be no special assessment or insurance premium for the coverage assessed on quarterend balances over the current $250,000/account limit. Instead, the FDIC will price its regular risk-based quarterly assessments to account for the additional insurance. But assuming the FDIC proposal goes through without major changes, the entire $480bn currently sitting in US checking accounts would be fully covered for the period between December 31, 2010, and December 31, 2012.

No discussion on just how the FDIC will insure not just all this capital, but all continue with its $100,000 insurance of traditional interest checking accounts, considering that the FDIC is broke. After all, if it gets to insurance getting actually paid out, it will be game over.

But of course, it is all about expectations. Which is why Abate believes this is merely a ploy to get money market holders to transfer their money from MMs to checking accounts, after conducting an appropriate cost-benefit analysis.

Unlimited transaction account coverage – even if temporary – poses a challenge for money market funds. At current levels, the average after-fee 7-day simple yield on prime institutional money funds is just 7bp. Thus, besides the insurance coverage, there is little difference between money fund accounts and checking account balances. Traditionally, this has not been the case, as money funds typically yielded more than bank deposits in order to compensate depositors for the absence of (limited) deposit insurance. On the surface, then, the provision of unlimited deposit insurance on a close substitute that also yields (close to) nothing could encourage institutional investors (those most likely to exceed the current $250,000 deposit insurance limit) to shift their balances back into banks.

Despite these super-low rates, money fund balances have held fairly steady since late spring. We suspect that part of the stability may reflect the fact that among institutional investors, the current amount of deposit insurance coverage ($250,000) is not sufficiently high to shift their cash allocation to banks. With only that level of coverage, institutions may feel more secure holding their multi-million dollar cash deposits at money funds, where the fund manager’s commitment to a stable net asset value acts as a weak form of insurance.

It is possible that unlimited transaction account insurance might tip the balance sharply in favor of checking account balances over money funds. If institutional investors prefer the FDIC’s explicit guarantee to the money fund sponsor’s promise to maintain a stable NAV, then money fund redemptions could increase. The pace of redemptions – if any – would ultimately depend on what value institutional investors place on having explicit principal protection. If this isn’t worth the 7bp they earn after fees on money fund deposits, they may stay put. But according to a recent Federal Reserve working paper, institutional money fund investors tend to be fairly flight prone – pulling their deposits quickly at the first sign of financial distress. (“The Cross Section of Money Market Fund Risks and Financial Crises,” P. McCabe, Federal Reserve Board working paper, September 2010.) This suggests a fairly strong sensitivity to principal protection over yield among the $1.2trn in institutional money in stable net asset value funds. As a result, some portion of these balances could leave for bank checking accounts. Of course, the value of insurance becomes apparent only in a crisis. As a result, with financial markets stabilizing, it’s possible that institutional money has become less flight prone. If true, the value of the FDIC’s insurance coverage might not be worth much for institutional investors. Until the insurance coverage takes hold at year-end, though, it’s not clear how much of the $1.2trn in institutional money fund balances could depart for banks.

We continue to be surprised by the eagerness of the administration to forcefully evacuate prime money market funds. The aggressive insistence to make life for MM investors a living hell, can only mean that should the true NAV of the majority of money markets be disclosed it would make the "breaking the buck" incident which nearly destroyed the system more than anything else in the days after the Lehman collapse a daily event. We hope we are wrong about this.

Guest Post: Welcome to the Mania!

Submitted by Jeff Clark of Casey Research

Welcome to the Mania!

With gold punching the $1,300 mark, thoughts of what a gold mania will be like crossed my mind. If we're right about the future of precious metals, a gold rush of historic proportions lies ahead of us. Have you thought about how a mania might affect you? Not like this, you haven't…

You log on to your brokerage account for the third time that day and see your precious metal portfolio has doubled from last week. Gold and silver stocks have been screaming upward for weeks. Everyone around you is panicking from runaway inflation and desperate to get their hands on any form of gold or silver. It's exhilarating and frightening in the same breath. Welcome to the mania.

Daily gains of 20% in gold and silver producers become common, even expected. Valuations have been thrown out the window – this is no time for models and charts and analysis. It's not greed; it's survival. Get what you can, while you can. Investors clamor to buy any stock with the word “gold” in its title. Fear of being left behind is palpable.

The shares of junior exploration companies have gone ballistic. They double and triple in days, then double and triple again. Many have already risen ten-fold. You have several up 10,000%. No end is in sight. Your portfolio swells bigger every day. Your life is changing right in front of you at warp speed.

Every business program touts the latest hot gold or silver stock. It's all they can talk about. Headlines blare anything about precious metals, no matter how trivial. Weekly news magazines and talk-radio hosts dispense free stock picks. CNBC and Bloomberg battle to be first with the latest news. Each tick in the price of gold and silver flashes on screen, and interruptions offering the latest prediction seem to happen every fifteen minutes. Breathy reporters yell above the noise on the trade floor about insane volume, and computers that can't keep up. Entire programs are devoted to predicting the next winner. You watch to see if some of your stocks are named. You can't help it.

The only thing growing faster than your portfolio is the number of new “gold experts.” It’s a bull market in bull.

You can feel the crazed mass psychology all around you. Your co-workers know you bought gold some time ago and pepper you with questions seemingly every hour, interrupting your work. They ask if you heard about the latest pick from Fox Business. They want to know where you buy gold, who has the best price, and, by the way, how do I know if my gold is real? They all look at you differently now. Women smile at you in the hallway. You worry someone may follow you home.

Your relatives once teased you but now hound you with questions at family get-togethers – what stocks do you own? What's that gold newsletter telling you? Where can I keep my bullion? You don't want to be the life of the party, but they force it – it's all anyone wants to talk about. Your brother tells you he dumped his broker and is trading full-time. Another relative shoves his account statement in front of you and wants advice. You sense someone will ask for a loan. You don't know what to tell people. The attention is discomforting, and you feel the urge to escape.

At first it was exciting, then breathtaking. Now it's scary. You're drowning in obscene profits but are becoming increasingly anxious about how long it can last. Worry replaces excitement. You don't know if you should sell or hold on. Nobody knows what to do. But the next day, your portfolio screams higher and you feel overwhelmed once again.

You grab the local paper and read the town's bullion shop had a break-in last night. They hired a security company and have posted several guards outside and inside the store. Premiums have skyrocketed, but lines still form every day. The proprietor hands out tickets when locals arrive: your number will be called when it's your turn… the wait will be long… please have your order ready… yesterday we ran out of stock at 11am.

You begin to worry about the security of your own stash of bullion – those clever hiding spots don't feel quite as secure as you first thought they'd be. Is the bank safe deposit box really secure? Shouldn't they hire a security guard? Should I move some of it elsewhere? Is there anywhere truly safe? You find yourself checking gun prices online.

And it's all happening because the dollar is crashing and inflation has scourged every part of life. You curse at those who said this couldn't happen and mock past assurances from government. Cash is a hot potato, and spending it before it loses more purchasing power is a daily priority. Everyone is clamoring to get something that can't lose value, but mostly gold and silver.

Your wife calls and says the $100 you gave her that morning isn't enough to buy groceries for dinner. Prices change often on everything. She urges you to get some bread and milk before the stores raises the price again. You suddenly remember you're low on gas and make plans to leave work early to beat others to the filling station. Restaurants and small businesses post prices on a chalkboard and update them throughout the day. Employers scramble to work out an "inflation adjustment" for salaries. 

On your way home, the radio broadcaster reports the government has convened an emergency summit of all heads of state. They're working urgently on the problem, and all other agendas have been tabled. Outside experts have been called in. We're going to solve this rampant flood of inflation for the American people, they say. In your gut you know there's nothing they can do.

You change the channel and hear about the spike in arrests of U.S. citizens at the Canadian border. Scads of people are caught trying to sneak bullion and stock certificates out of the country – from airports to rail stations. Violence at borders has escalated, and stories of bloodshed are getting common. The White House ordered heightened security at all U.S. borders, with the media reporting it can take days to cross. Foreign governments offer meaningless help, others mock U.S. leaders for their shortsightedness. Their countries are suffering, too.

You think about the gains in your portfolio and wince at the taxes you'll pay when you sell. Nothing has been indexed to inflation, so everyone has been pushed into higher tax brackets. Citizens are furious with government. Agencies have been swarmed with bitter taxpayers and revolting benefit recipients. One government office was set on fire. A riot erupted in Washington, D.C. last week and martial law was temporarily declared. It's too dangerous to travel anywhere.

As crazy as things are, it's hard not to smile. You're in the middle of a mania. Your life has changed permanently. You're part of the new rich. You can quit work, live off your investments. Your wife is ecstatic, and you both feel as if it’s your second honeymoon. Your kids are amazed and gaze at you with the same awe they did when they were children.

You're thankful you bought gold and silver before the mania, along with precious metal stocks. You daydream of where you might go, what you might buy. New options open up daily. You realize you'll need to meet with your accountant, maybe hire a second one to protect your sudden wealth. You wonder what you'll invest in next. You ponder what charities are worthwhile. Better meet with the attorney to redraft the will.

As night settles and your house quiets, you log on to your brokerage account one last time. Even though you're ready for it, your mouth drops when you see your account balance. It is truly overwhelming. You think of others who own gold and silver stocks and wonder if any have sold yet. Has Doug Casey exited?

You stare at the blinking screen, hand on the mouse, the cursor hovering on the sell button…

The Federal Reserves Tips Off Friends On Their Moves…ISN’T THIS ILLEGAL?

In a scathing piece by Reuters today, we get word that we have been thinking all along was indeed true.  That the Federal Reserve may be tipping off ex-members or “friendlies” on their actions.  Not only is this considered trading on the basis of insider information but it is blatantly illegal.  Instead of me getting to a big dissertation about the piece, just read it for yourself to see how deep the corruption runs.  In what has truly become a fucking joke, the United States Treasury, the Federal Reserve and all friends of both entities are breaking the law right in front of our noses.  Spread the word around to as many people as you can.  This ILLEGAL bullshit has got to stop!

To the outside world, the Federal Reserve is an impenetrable fortress. But former employees and big investors are privy to some of its secrets — and that access can be lucrative.

On Aug. 19, just nine days after the U.S. central bank surprised financial markets by deciding to buy more bonds to support a flagging economy, former Fed governor Larry Meyer sent a note to clients of his consulting firm with a breakdown of the policy-setting meeting.

The minutes from that same gathering of the powerful Federal Open Market Committee, or FOMC, are made available to the public — but only after a three-week lag. So Meyer's clients were provided with a glimpse into what the Fed was thinking well ahead of other investors.

His note cited the views of "most members" and "many members" as he detailed increasingly sharp divisions among the officials who determine the nation's monetary policy.

The inside scoop, which explained how rising mortgage prepayments had prompted renewed central bank action, was simply too detailed to have come from anywhere but the Fed.

A respected economist, Meyer charges clients around $75,000 for his product, which includes a popular forecasting service. He frequently shares his research with reporters, though he kept this note out of the public eye. Reuters obtained a copy from a market source. Meyer declined to comment for this story, as did the Federal Reserve.

By necessity, the Fed spends a considerable amount of time talking to investment managers, bank economists and market strategists. Doing so helps it gather intelligence about the market and the economy that is invaluable in informing the bank's decisions on borrowing costs and lending programs.

Some especially high-profile former Fed officials now have their own shops, too: Former Fed Chairman Alan Greenspan's Greenspan Associates offers policy consulting to Pimco, the world's biggest bond fund.

Though rarer, access is sometimes also bestowed upon outsiders. Paul Markowski, a China expert who counts hedge funds and foreign central banks among his consulting clients, has never worked at the Fed but says his relationships with officials there date back to the 1960s. For him, he says, it's a question of knowing the individuals on the committee well enough to understand their sometimes cryptic signals.

"You have to establish a relationship over time. If you go and see someone once or twice you are not going to be able to read what they are saying to you properly," he said. "They look at me, for one, as someone who has deep relations with the financial markets. It's a two-way street."

On the same day as the Fed's eventful August meeting, Markowski wrote to his clients: "While I thought they could hold off doing what they did, a senior Fed official told me that after measuring the risk of doing nothing they had little to lose and more to gain."

On Friday, Sept. 24, three days after the Sept. 21 meeting, he described a string of conversations with "three big Feddies."


This Has To Be A Joke: SEC About To Blame Entire Flash Crash On Waddell And Reed’s E-Mini Trades

Bloomberg has just released something which if true, will wipe out every last ounce of credibility left in the market. As readers will recall, the initial scapegoat that CNBC and everyone else, who has no clue what really happens in the market decided to pin the flash crash on, was small Kansas-based trading firm Waddell & Reed, which traded a few extra contracts of E-Mini futures in the hours preceding the flash crash. Well, ladies and gentlemen, if this advance glance into what the SEC is about to disclose in its flash crash report is indeed valid, then the entire flash crash is about to be blamed on Waddell and Reed once again, with no mention of High Frequency Trading, or any of the other real culprits for the drop which wiped out $1 trillion in market cap, and the furthermore the report will have no policy recommendations. This is so insulting to the general intelligence of the average American investor who has by now seen the destructive influence of HFT in action so many times, that it will wipe out the last remaining shards of credibility left in US stocks. Will Mary Schapiro next blame every single mini flash crash which we have seen on almost daily basis over the past month on Waddell and Reed as well? Or is that reserved for E-Trade retail accounts? We will not pass judgment until we see the final report, but if true, this is immediate grounds for termination of the SEC head, and will require that everyone pull their money from the market asap, as it will definitely confirm that even our regulators have no clue just how broken the market truly is. It will also confirm that every single SEC staffer has been bribed, bought and corrupted beyond repair by the HFT lobby.

From Bloomberg:

U.S. regulators have concluded that Waddell & Reed Financial Inc.’s trading of Standard & Poor’s 500 Index futures spooked traders on May 6, turning an orderly selloff into a crash that erased $862 billion from the value of American equities in less than 20 minutes, according to two people with direct knowledge of the findings.

Waddell & Reed’s selling of the E-mini futures was part of a normal hedging strategy, according to a report from the Securities and Exchange Commission and Commodity Futures Trading Commission that may be released as soon as today, said the people, who declined to be identified before the findings are made public. The Overland Park, Kansas-based company didn’t attempt to do anything nefarious, and its actions may not have prompted a retreat had there not been other concerns in the market, such as the European debt crisis, the people said.

Waddell & Reed will not be identified by name in the report, the people said. The document won’t make any policy recommendations, they said.

“I’m not sure it’s appropriate to comment on a report that doesn’t name us specifically, but it’s clear we were one of many traders that day,” said Roger Hoadley, director of communications at Waddell & Reed. “We were merely trying to manage downside risk in our portfolios.”

SEC spokesman John Nester declined to comment.


AIG Repaying Uncle Sam? Not By a Long Shot

Today’s AIG announcement has generated some surprisingly naive headlines. The company may have announced U.S. bailout exit plan, but that does not make it so. (Citi’s numbers don’t look any better).

Let’s take a closer look at the numbers and separate the facts from fiction:

Total Bailout: $182.3 billion dollars

Amount Still Owed:  $132.1 billion (as of June 30, 2010)

Shares Outstanding: ~700 million

Current price:  $39.10 (+$1.65)

Market Capitalization:  ~$27 billion dollars

Today’s transaction was the converting of Preferred  Stock that had a nominal value of $49.1billion — but this was privately held stock that did not trade. Its true value is actually unknown.

For valuation purposes, let’s imagine a hypothetical company that has myriad valuable parts worth about $30 billion dollars.  But the company also owes over $130 billion dollars to creditors. We would describe that firm as insolvent, and heading towards bankruptcy.

Yet that is not how people think of AIG. The wisdom of crowds seems to think that the government is going to keep a firm bid under the stock price. This same crowd also thinks share dilution is positive, and ran the stock up almost $5 dollars 5% on the news of another 12% dilution.

Management is selling off pieces of the company to repay the government. How they are going to find another $132 billion in value has not been remotely explained.

Converting Preferred to Common stock does reduce the massive AIG obligations any more than converting a 20 into 2 tens makes you any wealthier . . .

This is little more than a shell game

China Market Jumps to Close September

After a few weeks of looking like the China market might just roll over and signal a move down in the market, the Shanghai Index jumped solid back into positive technical levels. Copper and oil have broken out as well so it appears that October is set up for some gains in the stock market as well. The two smallcap China stocks we own, Puda Coal (PUDA) and Lihua International (LIWA) also appear

1 2 3 314