MetaFilter posts tagged with economics and banking

Obama's Big Sellout

moorooka — Thu, 10 Dec 2009 21:36:11 -0800

Taibbi-filter: Obama's Big Sellout What's taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.

“He who controls the money supply of a nation controls the nation”: James Garfield

Mutant — Sat, 03 Oct 2009 04:31:04 -0800

The First Bank of the United States was Americas first attempt at forming a Central Bank. Inaugurated by Congress in 1791, it was followed by The Second Bank of the United States, which was dissolved in 1836.

And then The United States of America was without a Central Bank for 77 years. Those were hardly halcyon years; as US States and banks shared responsibility for printing money, inflation, asset volatility, market crashes and even depressions were common, for example The Financial Panic of 1837, The Panic of 1857, The Panic of 1873 (aka "The Long Depression"), The Panic of 1893, and the Panic of 1907. Central Banks serve two very important groups of customers: they provide banking services both to the government as well as retail, commercial and investment banks. Also, as recent events have shown, the importance of their role as "lender of last resort" in time of financial stress (systemic as well as specific) can not be underestimated. Regardless, suspicion of Central Banking is very high in post bailout America, leading to a variety of demands ranging from requests for an audit of The Federal Reserve, to more extreme views that The Federal Reserve should be abolished altogether. But if not The Fed then who would control the nation's money supply?

As bad as inflation is deflation is much, much worse

Mutant — Sun, 27 Sep 2009 10:38:24 -0800

Why is deflation far worse than inflation? After all, prices are falling, goods and services get cheaper, what's not to like? Modern Central Bankers are well armed to wage war against inflation; high interest rates effectively slows the circulation of money, extinguishing inflation as the United States did by raising the Fed Funds rate to a record 20% in 1981. But these same tools don't apply to deflationary scenarios, as nominal interest rates can not be cut below zero, a barrier recognised by Fed Chairman Ben Bernanke who in 2004 concluded ¹ "the nominal policy interest rate may become constrained by the zero lower bound." [ .pdf ] And one must not underestimate the destructive power of deflation; as deflation pressures drive down prices, as the demand for goods and services first drops, then accelerates as businesses layoff workers, leading to further declines in wages even as unemployment rises. As deflationary expectations take hold defaults on loans of all types rise as the value of assets plummets and banks first curtail then totally stop lending, leading to the emergence of a vicious cycle much Japan's deflationary spiral. Adding to contemporary deflationary pressures, we know bank lending is declining, even among firms receiving government funds. So the question is how can we incentivise banks to begin lending again? Harvard Economist Greg Manikw has an idea - penalise banks for hoarding cash by canceling a percentage of currency held dormant in reserve and not lent to consumers and businesses; effectively achieving negative interest rates. In a similar vein, last July Sweden starting charging interest for funds held dormant by banks, effectively penalising institutions for hoarding cash and driving an increase in personal sector lending, while The UK considers the same approach. Will Bernanke and The Fed follow suit? ¹Bernanke, B., S., Reinhart, V., R., Sack, B., P., 2004, "Monetary Policy Alternatives in the Zero Bound" Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, D.C.

Hyperinflation in Zimbabwe wasn't all it appeared to be

Mutant — Tue, 22 Sep 2009 04:58:55 -0800

First Zimbabwe formally abandoned their currency, then received assistance from The IMF, and now now we're seeing inflation in that nation easing to an acceptable rate of 0.04% per month. So it's fair to ask, is hyperinflation in Zimbabwe is a thing of the past? There are five criteria seen in every documented case of hyperinflation; specifically

The population keeps most wealth in non financial assets
Any financial wealth is held in non local currency, and prices are quoted in that currency
Sales on credit explicitly price in expected inflation
Wages and interest rates are explicitly linked to inflation
Inflation of over 100% during a three year period is documented

So what was really behind Zimbabwe's remarkable - and devastating - hyperinflation? No, it wasn't imprudent monetary policy, nor was it unwise fiscal policy, it was something more base and easily understood. Hyperinflation in Zimbabwe was mostly caused by corruption, government officials and insiders enriching themselves at the cost of others. But amid all this good news, Zimbabwe's ruling elite don't like losing power, and there are genuine fears a return to the "bad old days" is just a matter of time.

Why the US won't see hyperinflation

Mutant — Wed, 13 May 2009 01:16:13 -0800

The Bulls vs. Bears? The incessant back and forth between equity market longs and shorts is well known to most retail investors via a variety of distribution channels; financial television, the print media, online news. But the really big market battle, one with the potential to impact the entire US economy, happens, as is usual in finance, just out of sight of retail eyes ... Not seen since the 80's, Bond Vigilantes is a phrase applied to institutional class investors who purchase government treasuries to satisfy their long dated obligations. Cognizant of the risks of inflation, they actively demand compensation in real terms for their investments. In recent weeks they have caused a UK government bond auction to fail, and have driven US bond yields higher. But even as Bond Vigilantes drive interest rates higher, the US Treasury is actively purchasing securities in the open market. This is, by any measure, an epic battle, one taking place almost sight unseen and one with very high stakes: can Ben Bernanke and the yet unseen US economic recovery tolerate higher bond yields? Speaking of the power of Bond Vigilantes to compel honesty in government spending, Clinton policy advisor James Carville, was famously quoted: "I used to think if there was reincarnation, I wanted to come back as the president or the Pope or a .400 hitter. But now I want to come back as the bond market. You can intimidate everybody"

A Banking System We Can Trust

kliuless — Sun, 03 May 2009 06:03:30 -0800

Limited Purpose Banking -- for lending, investing, etc. -- Turn all financial firms into mutual funds: "All mutual funds would break the buck with one exception: cash mutual funds. These funds would strictly hold cash and be valued at $1 per share. Owners of these funds would write checks against their balances and never have to worry about a bank run. Fractional reserve banking and the FDIC would be history." [previously] also see The Credit Crisis and Cycle Proof Regulation, Raghuram Rajan (cf. 1 2 3 4) on preventing/regulating 'cyclical euphoria' among financial institutions... and btw Fixing bankrupt systems is just the beginning, viz.

These bankers are Hoares

Mutant — Mon, 13 Apr 2009 05:22:09 -0800

The separation of the ownership of a business from its management is one of the defining characteristics of the modern capitalist system. But ongoing failures of corporate governance, particularly in banking, have called into question these structures. Is there a better way? Secretive UK private bank C. Hoare & Co. has a solution that works for those customers it chooses to accept. Structured not as a corporation but rather as private, unlimited liability company (i.e., the managers can be held personally liable for business decisions they make) for over 300 years the Hoare family have offered banking services in the UK. Thriving during the credit crunch, Chief Executive Officer Alexander Hoare spoke almost approvingly of the seldom used business structure -- “Unlimited liability, the joy of it is it keeps you jolly nervous”. Perhaps the much heralded G20 banking reform [ .pdf ] should mandate larger personal accountability, if not outright management ownership of institutions?

If FAS 157 started it will FAS 140 will keep the party going?

Mutant — Fri, 27 Mar 2009 11:14:59 -0800

The Fed's Public Private Partnership Program, promises to clear down as much as $1T worth of "legacy assets" from banks balance sheets. Globally, equity markets responded positively. But what about assets held off balance sheet? Off balance sheet vehicles originally were designed to mitigate risk, focusing investments into subsidiaries so credit ratings or leverage ratios of parent companies wouldn't be impacted. Many financial firms improperly used such vehicles to hide poorly performing assets, culminating in the well known collapse of Enron in 2002. Last July The Financial Accounting Standards group postponed FAS statement 140 - which would require firms to move assets on to their balance sheets - for one year, an impending deadline that concerns many analysts. How much is held off balance sheet? As of Q1 2009 off balance sheet assets at the four largest US banks - Wells Fargo, JP Morgan, Citigroup and Bank of America - totaled roughly $5T, or a sum potentially dwarfing Geithner's trillion dollar plan. Regulators are aware of the problem and already are planning to increase requirements for economic capital, but considering how reluctant the United States was to adopt Basel II [.pdf] , a real fix could take a while. Note: FAS 157 - the accounting standard requiring that banks mark assets to market not to model - now suspected to have triggered the credit crunch, was previously discussed here.

To everything there is a season and this is true of Economics

Mutant — Fri, 06 Mar 2009 05:27:10 -0800

Everybody knows the economy and thus the markets move in cycles. Economic expansion naturally leads to contraction, driven by credit and business cycles. But are economic booms followed by busts inevitable? At Business School today we accept and even teach cycles, for example the Kitchin inventory cycle (three to five years in length, first postulated by Joseph Kitchin in 1923), the Juglar fixed investment cycle (seven to eleven years in length, discovered by French physcian Clement Juglar in 1860) and the Kuznets infrastructue investment cycle (fifteen to twenty five years in length, postulated by Nobel Laureate Simon Kuznets), but could there be longer wave cycles dominating and driving these higher frequency waves? Nikolai Kondratieff was a Russian economist who favoured a holistic view, believing that efficient forecasts of economic activity and thus the markets had to integrate social and cultural trends. This broad perspective convinced him that amid the apparent chaos of the capital markets, long term unifying processes existed which could be leveraged for forecasting purposes. Kondratieff believed capitalism followed forty to sixty year cycles of economic growth followed by depression. These cycles are now known as "Kondratiev waves". Kondratieff waves postulate four basic "seasons" to the economic cycle; Summer, characterised by sharp increases in the money supply, leading to investment and inflation. Spring follows as the money injected into the economy during summer drives an expansion in business activity. Autumn, which sees a peak in share prices and relatively high debt levels amid slowing business activity is followed by Winter, where we observe bankruptcies and cratering share prices. To many followers of Kondratieff, the G20 are currently deep in winter [.jpg]. , and some have put together data summarising Kondratieff winters since the 1700's. While there is not much academic research corroborating Kondratieff's work, during periods of economic stress we tend to see increased interest in wave theories.

All predictions are wrong. Or are they?

Mutant — Wed, 07 Jan 2009 02:13:13 -0800

Every year the Strategy Team at Saxo Bank, a Danish virtual bank, publishes a list of ten black swan class market events. Some of the more dramatic possibilities Saxo advance for 2009: crude trading down to $25 a barrel causing severe social unrest in Iran, the S&P 500 falling to 500, Chinese GDP approaching zero and several member states dropping the Euro. The complete 2009 list is here and for completeness their 2008 [ .pdf ] , 2007 [ .pdf ] and 2006 lists [ .pdf ] are also available. Popularised by Nassim Taleb's The Black Swan: The Impact of the Highly Improbable, black swan events are by definition statistical outliers. Low in probability but potentially high in impact, even in the best of times prudence would dictate market participants at least be aware of - if not plan for - all possibilities.

"... first by inflation and then by deflation, ..."

Mutant — Thu, 20 Nov 2008 04:28:22 -0800

Tangible evidence of deflation? The prices of commodities, houses and a wide range of consumer goods have collapsed, with observers predicting continued declines. While many point back to The Great Depression as an example of damaging deflation, the recession of 1920-1921, a frequently overlooked period in economic history, is perhaps the best example we've got of a deflationary wave similar to what might now taking place. During the period 1920 to 1921, wholesale prices declined some 36%, "the largest one year decline on record" (Vernon, 2007)¹ [.pdf] . By contrast, US CPI declined 1% for the month of October alone (roughly 13% annualised), the largest drop observed in 61 years, and a rate that may accelerate as The Great Unwinding continues. Deflation: The Good, The Bad and The Ugly. Excellent single link deflation Q&A. ¹Vernon, J., R., 2007, The 1920-21 Deflation: The Role of Aggregate Supply, Economic Inquiry, Volume 29 Issue 3, pp 572 - 580

Money for nothing: a new era of zero interest rates?

Mutant — Wed, 12 Nov 2008 03:27:18 -0800

The Fed cut 100 bps. BOE cut 150 bps. ECB cut 50 bps. India, Vietnam, The Czech Republic, Switzerland, Denmark, South Korea and other nations have all cut interest rates in recent weeks, with many Central Banks cutting more than once. The G20 is now discussing the possibility of further, coordinated interest rate cuts. As interest rates globally plummet, we are observing what some analysts are calling "The Race to Zero". Today almost every nation in both the developed and developing worlds is deeply in the territory of negative real interest rates. In other words, savings kept dormant in the bank loses, rather than gains, value. As the long anticipated great unwinding continues Central Bankers seem to be hoping that low interest rates will force consumption, pushing economies forward at the same time monetary policy pulls. Given this backdrop, a natural question would be how low can interest rates go? The answer may lie in an unpublished Federal Reserve research paper, "Monetary Policy when the Nominal Short-Term Interest Rate is Zero.” (Clouse, J., et al, 2000) [.pdf] Bonus street cred: Two of the authors are architects of some of the unconventional mechanisms currently deployed by The Fed to fight this crisis (Clouse, J., Small, D., 2004) [.pdf]. No time for lengthy pdfs, no problem! The New York Fed published a single page, very accessible summary [.pdf] of unconventional tools currently in use. Full citation of research papers cited: Clouse, J., Henderson, D., Orphanides, A., Small, D., Tinsley, P., 2000, "Monetary Policy when the Nominal Short-Term Interest Rate is Zero”, unpublished, Federal Reserve Board, Finance and Economics Discussion Series, 2000-51 FEDS Papers, Board of Governors of the Federal Reserve System Clouse, J., Small, D., 2004, "The Scope of Monetary Policy Actions Authorised Under The Federal Reserve Act", Federal Reserve Board, Finance and Economics Discussion Series, 2004 FEDS Papers, Board of Governors of the Federal Reserve System

The most obscure but perhaps the most important economic indicator we've got

Mutant — Fri, 31 Oct 2008 04:25:25 -0800

How best to take the pulse of the global economy? While market driven rates such as LIBOR or US Government T-Bills reveal the state of fixed income and Credit Default Swaps tell the observer much about possible default rates, many analysts prefer a more basal view. The Baltic Dry Index is one such indicator. For over 250 years member companies of the Baltic Exchange have tracked the cost of shipping goods across the globe. Everyday they produce The Baltic Dry Index, which is nothing more than "...a daily average of prices to ship raw materials". The performance of this index is unbiased as speculators do not participate in this market; hence we consider this an effective forward looking indicator of the expected state of the global economy, and presently the Baltic Dry Index is tanking. Looking for the bright side? The Baltic Dry Index tells us its now over 90% cheaper to ship goods and material across the globe than it was a year ago. At least until bankruptcies in the shipping sector reduce capacity to fit demand.

In praise of small banks

up in the old hotel — Thu, 30 Oct 2008 12:43:40 -0800

The nine biggest US banks aren't using $125 billion in federal bailout money to make loans. They're going to use taxpayer dollars to buy other banks. That's not what we were led to believe when Henry Paulson forced the nine banks to take the money. Turns out the banks could do as they wished with the money. What about small banks? We seem to have forgotten about the thousands of local, community banks. They have functioned well in the crisis, and reports suggest that they have even benefitted. A veteran banker who works for one of the big US banks says it's time we did something to help them. Smaller banks, he says, are part of the community and have a better understanding of who their customers are. "If we make the bailout funds available to the community bankers, I promise they will know what to do with the money. They will lend it and they will make prudent lending decisions, based on direct and comprehensive knowledge of the borrower. So what are we waiting for?" The big banks -- BofA, Citibank, JPMorgan -- aren't lending because they don't know their customers. They have depersonalized lending by relying on inaccurate credit scoring to make loans. Sometimes lenders don't even do that. This got the banks into trouble. They wound up with toxic assets of dubious value on their balance sheets. It seems that this depersonalization goes to the heart of the global financial crisis. In finance, it's sometimes referred to as the "principal-agent problem." It means looking at numbers instead of people.

You don't really own the shares you think you own

Mutant — Fri, 24 Oct 2008 06:30:10 -0800

All the stocks and bonds you think you own are actually owned by a company you've probably never heard of, a company owned by the same people who own the US Federal Reserve. Originally paper stocks certificates were issued as evidence of ownership by companies to investors purchasing shares. But as trading volume exploded in the late 60's this manual system didn't scale. As an increasing number of trades failed due to paper processing backlogs The New York Stock Exchange took the unprecedented steps of closing on Wednesdays in 1968. [.pdf] In response to the crisis The Central Certificate Service (CCS) was created to electronically settle trades and eliminate the need for share certificates. Although intended as a temporary measure, it is still with us. Financial assets purchased today aren't registered in your name; rather they are held in what's known as street name. Regardless of the assets purchased or the broker used, this name is almost always a successor of CCS, namely The Depository Trust & Clearing Corporation (DTC), or some anomalous sounding variant of "Cede & Co". Holding assets in excess of $40T (yes, trillion), DTC is the single largest private trust in the world - in fact the largest company you've probably never heard of. While DTC no doubt provides a critical service - standing behind and insuring the performance of hundreds of thousands of broker / dealers, institutional investors, banks, mutual funds, insurance companies and hedge funds, many people are critical of this quasi-monopoly. While some say a system like DTC facilitates short selling, and and other forms of market manipulation, others claim the interests of American shareholders have been superceded by this system of indirect stock ownership, and the technology now exists to revert to direct ownership of stocks [.pdf]. But, as the business of big business is indeed, big business, whether or not these temporary measures will ever be removed is anyones guess.

Essential Credit Crunch Reading

Mutant — Mon, 13 Oct 2008 01:29:39 -0800

Afraid to read the daily news? Need some broader perspective on The Credit Crunch? There are lots of different ideas by lots of different authors floating about ... One idea is we simply pay up! In The Trillion Dollar Meltdown, Charles Morris advises that we take the hit in one lump sum. A TRILLION DOLLAR lump sum. And what if that impressive lump sum isn't impressive enough? Morris covers that possibility in The TWO Trillion Dollar Meltdown (someone please stop him before he writes another book!) Embrace the destruction. William Fleckenstein and Fred Sheean in Greenspan's Bubbles argue that we've been saved from bubbles one too many times. Let nature take it's course! Simplify the system seems to be a theme several writers have raised. Both George Soros in The New Paradigm for Financial Markets or Richard Bookstaber in A Demon of Our Own Design argue that we should simplify financial instruments, and stop market participants from employing excessive leverage. While simplification is attractive, in The Subprime Solution Robert Shiller not only outlines the causes of the subprime mess, he argues that this crisis shows us the desire to own a home is a problem calling out for a solution. He suggest the creation of a new class of financial product is needed, something he is calling "continuous-workout mortgages", where payments are dynamically adjusted according to an individuals ability to pay. Back to basics. In Bad Money, Reckless Finance Kevin Phillips argues that we've let Wall Street and financial services dominate the US economy, and now it's time to revert to our roots, manufacturing. He is busily writing a follow up, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism which seems to cast a wider net of blame. A crash is inevitable. In Wealth, War and Wisdom Barton Biggs notes that we see systemic crashes about one a century. Its gonna, no, GOTTA happen! And in the end, keep in mind that we're all in this together. In The Panic of 1907: Lessons Learned from the Markets Perfect Storm Robert Bruner & Sean Carr looked at one of the lesser known (but still very severe crashes), and showed how "collective action by leaders can arrest the spiral" . Everyone pitched in, pulled together and reduced the impact. So fight, simplify, surrender, pay up, create new instruments, no matter how you're planning to weather the storm, you'll have plenty of reading to while away the time.

Another potentially huge settlement day for CDS contracts ...

Mutant — Fri, 10 Oct 2008 02:32:15 -0800

Credit Default Swaps (CDS) are derivative instruments providing the purchaser with protection against default on an underlying financial asset. When Fannie Mae and Freddie Mac technically defaulted on September 7th there was much speculation that the CDS market would collapse as a result of protection being invoked on $1.4 trillion dollars worth of debt. On October 6th these derivative contracts settled, and the CDS market didn't collapse with recovery rates of 92% being observed. Today CDS contracts protecting against the default of Lehman Brothers settle. The problem? Because industry lacks a central clearinghouse for these derivatives, nobody is really sure how many CDS contracts were written either by Lehman or by other banks providing protection against a Lehman default. Next on the list are CDS' covering Washington Mutual, which are due to settle October 23rd.

Meanwhile efforts to create a clearing house continue, as some folks speculate that the settlement of Credit Default Swaps is a major reason why banks are hoarding cash.

This is not your FDIC. This is the Rich White Man's FDIC.

Mutant — Fri, 26 Sep 2008 02:47:19 -0800

A private FDIC?

The Certificate of Deposit Account Registry Service, or CDARS, is a way to conveniently spread bank accounts across multiple banks. CDARS, run by privately held Promontory Interfinancial Network, offers its customers up to $50 million of deposit insurance, or exactly 500 times single account limit mandated by the FDIC. Promontory does this by arranging to distribute client funds nationwide in $100K increments to over 2,300 banks. Promontory is nothing if not well connected: while founders Mark Jacobsen previously served as Chief of Staff at the FDIC, co-founders Alan Blinder was Vice Chairman of the Federal Reserve and Eugene Ludwig was Comptroller of the Currency, several former members of the FDIC currently serve on Promotory's board.

Not surprisingly, some folks are openly critical of Promotory, some going so far as to state "It undermines a lot of the safeguards around the FDIC deposit fund."

Saturday night poker night is about to get a lot more interesting ...

Mutant — Mon, 22 Sep 2008 02:40:56 -0800

Hedge Funds employ many different strategies to make money. There are long/short funds, event driven funds, emerging markets funds [.pdf], funds looking to profit from global macroeconomic trends and a large number of funds employing a wide range of arbitrage techniques to make money.

But these techniques are the tried and the true. As both assets under management and market turmoil have grown significantly, hedge funds are rapidly branching out into domains far, far detached from finance: art, litigation funding and now even poker.

Banking shares: New Day or False Dawn?

Mutant — Tue, 09 Sep 2008 03:39:42 -0800

A bottom for banking? Buying or selling shares in a company one manages - insider trading - is legal in The United States, provided the relevant forms are filed with The SEC. This information is then made available to the general public via EDGAR, Sec Form 4, or high level aggregators. Investors scour web sites for such filings, as purchases or sales of a companies shares by insiders are public evidence of managements private opinions regarding the future prospects of the firm they are running.

Even before yesterdays relief rally insider buying in banking shares hit a two decade high. So does this surge in buying indicate the worst is over in banking? When trading its best to pay close attention to a broad range of signals, because sometimes even the insiders get it wrong.

Those markets? Well, it seems they work like they are supposed to ...

Mutant — Thu, 28 Aug 2008 04:14:50 -0800

Are funds calling a bottom to the US housing market? Even as house price declines are beginning to slow, home sales may have stablised and resales look healthy, big money - $5B here, $3B there, over there $2B and lots and lots of smaller amounts - is being deployed to take housing assets off banks balance sheets.

Meanwhile, Fannie Mae and Freddie Mac are actually booking the biggest profits on new mortgages since 1998. It ain't over 'til it's over, but in the markets you take what you can get.

"A national debt will be to us a national blessing." Alexander Hamilton, Secretary of Treasury,1780

Mutant — Tue, 26 Aug 2008 02:30:39 -0800

Even as I.O.U.S.A, a documentary looking at the United States' $53T national debt, is to be shown at both the Democratic and Republican conventions, economists are beginning to openly discuss the previously unthinkable - should America should default on some or perhaps all it's obligations? Although some argue a sovereign default by the United States would not be the end of the world, with political fallout more severe than financial, most overlook the obvious: America has been quietly, slowly, but most certainly defaulting on much of it's outstanding debt since 2002, when the most recent Great US Dollar collapse began. A similar "soft default" occurred in the late 1970's when The United States, faced with apparently insurmountable foreign debts, engineered a US Dollar decline in cooperation with the Group of Seven Industrialised Nations. Apparently when deciding between reducing the US debt or maintaing a strong US Dollar, those in charge decided to sacrifice the greenback. Tough one if you're holding long term US Treasury bonds.

The Material Girl is now a tangible investment

Mutant — Wed, 20 Aug 2008 02:50:40 -0800

Follow the money: for the past year, the big trade was short bank stocks, and use the cash to go long oil. Massively profitable, but now that trade is unwinding. So where is the big money being invested now? Lots of places: diamonds, fine art, guitars, and Madonna.

While this is timely information bank failures are normal part of life.

Mutant — Mon, 14 Jul 2008 06:58:14 -0800

Worried about bank failures? First step: check if your bank is insured by the Federal Deposit Insurance Corporation (FDIC). If so, then your first $100K is insured against loss so no worries.

Got more than $100K? Well then, you'd better speak with EDIE. EDIE (the Electronic Deposit Insurance Estimator) will tell you exactly how much FDIC insurance coverage you've got. The maximum coverage is $100K per depositor per savings account per institution. So one approach would be to distribute one's money at multiple financial institutions. But by enlisting the entire family, the apparent FDIC limits for deposits at a single institution can be circumvented. Assuming we're talking about a married couple with two children, here's how it works. Husband and wife each maintain separate savings accounts, gaining FDIC coverage on an aggregate amount greater than $100K but less than $200K. The children can help out here as well; by opening accounts in their name, and using either a living trust or what is called a Payable On Death account another $100K per child will gain FDIC protection. And IRAs, are insured to a max of $250K per account holder, regardless of other funds on deposit. Using this approach, a family of four can gain FDIC coverage totaling almost one million dollars of deposits at a single institution. What ever you do, don't make these mistakes. Troubled by trusts? Confused by all these accounts? Well, the simplest approach would be to deposit your money into one of the 73 Massachusetts based banks which is a member of both the FDIC and The Depositors Insurance Fund (DIF). After FDIC coverage has been exceeded, this private insurance covers any shortfalls. The last time we saw a large number of bank failures, the DIF covered uninsured losses of some 6,500 depositors at 19 failed member financial institutions. Since it's inception "no depositor has ever lost a penny in a bank insured by both the FDIC and the DIF".

Sir John Templeton, 1912-2008, RIP and thank you for the investing lessons.

Mutant — Wed, 09 Jul 2008 03:48:25 -0800

The simple phrase "it's different this time" are the four most expensive words in the English language. Sir John Templeton, 1912-2008, we thank you for this lesson and countless others. One of modern finance's greatest pioneers, in 1954 Sir John Templeton launched what was one of the first globally oriented mutual funds, Templeton Growth Fund. At that time, almost nobody invested outside The United States. However Templeton argued that by restricting choices to domestic securities, investors were denying themselves of the chance to markedly increase portfolio diversification, lower volatility while increasing overall returns. Today Templeton's approach to portfolio diversification is textbook at business schools. Ideas and theories he devised and put into practice decades ago led to such stunning performance that in 1999 Money Magazine called Sir John “arguably the greatest global stock picker of the century”. Over a period of forty years, Templeton Growth Fund returned an average of 14.5% per annum. In 1992, a month before his 80th birthday, Templeton sold his mutual fund empire for a reported $440 million to Franklin Resources Inc. of San Mateo, California. While still was active in the fund's strategic management, Templeton next turned his attention to religion and charitable endeavours, founding the John Templeton Foundation which he intended to "serve as a philanthropic catalyst for research on concepts and realities such as love, gratitude, forgiveness and creativity." Sir John did, however, leave those of us still learning how to invest with one final gift: Sir John Templeton's 16 Rules for Investment Success. [.pdf] Sir John Templeton, 1918-2008, RIP and Godspeed.