The Sound Of Distant Helicopter Engines

[grapejelly]

Re: The Sound Of Distant Helicopter Engines

I think the MM accounts that EJ is talking about are those that are found in brokerages, essentially mutual funds that attempt to maintain a constant redemption value of $1 plus interest at some rate.

I am all in a 100% US treasury fund and have been for some time. Because of stuff like this. And commercial paper which isn't any better these days, since there is apparently no market for a lot of it today

[EJ]

Re: The Sound Of Distant Helicopter Engines

I called the two companies I have MM funds with: Capital One and National City. I asked if there was any way the principal could go down with changing markets. They both told me it was essentially like a bank account with a fixed interest rate. The principal would not go down except for money I withdrew.

Should I feel assured, or did I ask the wrong question or talk to the wrong people?

That's not an entirely honest answer. Banking at About.com says:

"First, a money market fund is technically a security. The fund managers attempt to keep the share price constant at $1/share. However, there is no guarantee that the share price will stay at $1/share. If the share price goes down, you can lose some or all of your principal. The US Securities and Exchange Commission notes that 'While investor losses in money market funds have been rare, they are possible.' In return for this risk, you should earn a greater return on your cash than you’d expect from an FDIC insured savings account (money market funds are not FDIC insured)."

I'd ask them directly if the MM fund is invested in any bonds rated below investment grade.

[Uncle Jack]

Re: The Sound Of Distant Helicopter Engines

The money market funds I've been using for clients since being on my own is one that holds only u.s. treasuries. Sure, the rate isn't that stellar, but being off 20% on what you thought was cash could be a real downer.

If you think there is a liquidity crunch now, just wait until Mom and Pop think that their cash is invested in the polluted risk. It'll be lights out as everyone runs for the exits.

[jk]

Re: The Sound Of Distant Helicopter Engines

if i'm not mistaken, the european fund that was "down 20%" was down in ASSETS, not value per share. i.e. there was a run on the bank [money market fund], with scared investors pulling their money out. some money market funds shut off redemptions. scary enough.

[Tet]

Re: The Sound Of Distant Helicopter Engines

if i'm not mistaken, the european fund that was "down 20%" was down in ASSETS, not value per share. i.e. there was a run on the bank [money market fund], with scared investors pulling their money out. some money market funds shut off redemptions. scary enough.

Bank Holiday tomorrow and Sunday. Timing couldn't be better.

[FRED]

Re: The Sound Of Distant Helicopter Engines

if i'm not mistaken, the european fund that was "down 20%" was down in ASSETS, not value per share. i.e. there was a run on the bank [money market fund], with scared investors pulling their money out. some money market funds shut off redemptions. scary enough.

We haven't checked into our friend's account yet in detail, but thought we'd pass the report on anyway. We're getting email from iTulip folks who are checking into their MM accounts and getting less than direct answers, but nothing ugly.

[Uncle Jack]

Re: The Sound Of Distant Helicopter Engines

I see it here and then I see Fleckenstein mentioned it.

Money-market dark matter?
The moral of the story? As we get further down the road, I think we'll discover that some money-market funds owned commercial paper issued by a conduit whose assets may not be up to snuff. So folks with a lot of assets in money-market funds might want to double-check that they know what's in them.

Bottom line: The upcoming weeks should be pregnant with indications of more trouble throughout the whole financial-engineering world. More than a few outfits may discover that the triple-A pieces of paper they thought were worth 100 cents on the dollar are worth only, say, something in the 70s. That will make for a lot of heartache.

http://articles.moneycentral.msn.com...ix.aspx?page=2

I suspect that this is going to gain huge traction over the weekend. Another minor panic with huge ramifications in the making.

[bart]

Re: The Sound Of Distant Helicopter Engines

Indeed, these are short term loans. The Fed is not yet dropping cash and flying off with a barrel of live grenades. For the moment, it is extending short term loans to give banks time more time to find buyers for the barrels of live grenades before they blow up. The Fed really doesn't want them, both because they do not want to encourage further moral hazard and because they really do not want the grenades on their books. But, at the moment there is no market for these grenades, and one will probably not appear before the term of these loans expires, so new loans will need to be extended.
...

Nicely put EJ.

The only thing I can add is perhaps some perspective. The grand total TOMOs in the last 5 days is around $88 billion, and no POMOs. The 5 days after 9/11, the total TOMOs was around $280 billion, and also no POMOs.

[Finster]

Re: The Sound Of Distant Helicopter Engines

Finster, maybe I have my limited knowledge of the FED backwards, but I'd like to raise a question(s) about the nature of these FED actions.

As I understand it, these were TOMOs with the emphasis on the T (temporary), that is, they mature on Monday. I wouldn't call this a helicopter drop (not that you necessarily did either given the thread title). It seems more of a stopgap measure to give banks some time to sort out their respective messes rather than a bailout. Neither does it look unique to me that the FED is putting out TOMOs on MBS either. Neither does the amount look extreme.

Am I missing something here?

For that matter, I guess I could have addressed this question to Tet or Sapiens as this doesn't look like a land grab by the FED (yet). If there was a POMO for this stuff, then I would freak.

I agree that the ECB intervention is massive although I don't know the nature of their action (TOMO, POMO, or maybe the euros have some other mechanism for manipulating the market).

I think EJ et al addressed the question fully supra. Any remaining issues, let me know.

[WDCRob]

Re: The Sound Of Distant Helicopter Engines

Indeed, these are short term loans. The Fed is not yet dropping cash and flying off with a barrel of live grenades. For the moment, it is extending short term loans to give banks time more time to find buyers for the barrels of live grenades before they blow up. The Fed really doesn't want them, both because they do not want to encourage further moral hazard and because they really do not want the grenades on their books. But, at the moment there is no market for these grenades, and one will probably not appear before the term of these loans expires, so new loans will need to be extended.

So what then? What happens if they keep issuing new loans, but the market for the securities(?) never appears? Fast Forward to inflation?

How much difference does it make whether the Fed is holding the grenades when they go off vs. the banks?

[jacobdcoates]

Re: The Sound Of Distant Helicopter Engines

here is an example of a regional banks money market investment profile, that i have just left

Money Market Instruments: Investment-grade, U.S. dollar-denominated debt securities with remaining maturities of one year or less. These may include short-term U.S. government obligations, commercial paper and other short-term corporate obligations, repurchase agreements collateralized with U.S. government securities, certificates of deposit, bankers’ acceptances, and other financial institution obligations. These securities may carry fixed or variable interest rates.		1-20		Market Credit

[DemonD]

Re: The Sound Of Distant Helicopter Engines

Regarding MM accounts:

Every MM account I've had at a brokerage has come with a prospectus and a mutual fund ticker.

Son of a...

I just looked at the Vanguard "stable" fund and a whole crapload of them are backed by MBS.

Probably would not have dug that deep without warning from itulip.

I was going to say many MM accounts work like that, backed by bonds and whatnot. Fortunately I've liquidated any cash in my brokerages, but dammit, now I gotta figure out what to do in my 401k.

[WDCRob]

Re: The Sound Of Distant Helicopter Engines

Would a bank's MM possibly be at the same risk?

[raja]

Re: The Sound Of Distant Helicopter Engines

We haven't done much digging yet, but I recommend readers take a look at their money market funds to make sure they are safe. If you have any doubts, you may want to call your brokerage or bank and find out what you MM fund is made out of.

Can someone comment on the safety of assets held in brokerage houses such as Ameritrade?
I've got some GLD and FXY invested through Ameritrade. What are the risks beyond the investments themselves?

[Andreuccio]

Re: The Sound Of Distant Helicopter Engines

Regarding MM accounts:

I was going to say many MM accounts work like that, backed by bonds and whatnot. Fortunately I've liquidated any cash in my brokerages, but dammit, now I gotta figure out what to do in my 401k.

Good God! I didn't think of that.

About 30% of my 403b is in Fidelity's Cash Reserves. The overview reads: "Primarily invests in U.S. dollar-denominated money market securities, including U.S. Government securities, and repurchase agreements, and enters into reverse repurchase agreements. The fund invests more than 25% of its assets in the financial services industry. An investment in this portfolio is not guaranteed or insured by the FDIC or any other government agency. Although this money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in this fund. Yield will vary."

That doesn't sound too promising given what I've read here. I had assumed this was the safest fund. Maybe not. But where to put the money?