Last year, we advised investors to transfer all money market assets to money market funds that invest exclusively in US Treasuries Notes (Better Safe Than Sorry” Aug 21, 2007).

That was due to the then new credit crisis and the then recent insolvency of a money market fund and the risk of some funds “breaking a buck” (NAV falling below $1.00).

Today we reissue and redouble that advice, and take it one step further.

For all of your liquidity (”cash” and “near-cash”) in money markets or in banks:

• if it’s in a money market fund, transfer assets to a US Treasuries money market fund (which means no corporate debt or government sponsored enterprise debt)
• if it’s in a personal or business bank account, reduce the account to $100,000 (the FDIC insured amount) and place the balance in other banks with $100,000 limits per account, or with a solid US Treasuries money market fund.

With FannieMae (FNM) and FreddieMac (FRE), who hold about 1/2 of US mortgages, considered to be insolvent, and IndyMac (IMB) seized by the FDIC yesterday in the second largest bank failure in US history, and with the ripple effects that will result throughout the financial sector, you should not exposure yourself to the consequential risk of loss in your “cash” position.

The Wall Street Journal reported today that FDIC figures show 37% of the nation’s $7.07 trillion of bank deposits are above the government insured limits.  While nobody expects all the banks to fail, the total uninsured amount is $2.6 trillion.

The yield advantage of holding money market assets exposed to credit risk is not great enough to warrant the current elevated default risks in the market place.  Money market losses are unlikely, but do you want to take that risk in today’s environment versus the reasons you hold liquid reserves in the first place?  We don’t and we are not.

We issue this advice beyond investment portfolios.  We think your business bank accounts should be evaluated too.  If you can avoid holding amounts above the insured limits, then you should consider doing so.

Intentional risk in stocks and bonds is one thing, but unintended risk in what was thought to be safe portfolio cash reserves or business operating funds is something else altogether.

There is risk enough in your stock and bond allocations.  Your cash liquidity position needs to safe so you won’t be sorry,

Richard Shaw
QVM Group LLC

This entry was posted on Saturday, July 12th, 2008 at 5:37 pm and is filed under Asset Allocation, Banks, Risk Management. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.