by David Stanowski
27 August 2007
The fallout from the real-estate bubble recently lead to a run on one bank, and trouble in the commercial paper market. Since many people have a good portion of their money in banks, or in money market funds (that may invest in commercial paper), it is high time to ask this question!
Deposits in U.S. banks are insured up to $100,000 by the FDIC. The FDIC can cover losses fairly well when one or two banks fail, but they only have enough money in their accounts to pay off about 1% of the total amount of "insured deposits"! In the case of a major banking crisis, the FDIC would have to go to Congress to ask for emergency funding. Your money could be inaccessible for months, or even lost forever!
If you saw the way FEMA reacted to the crisis caused by Hurricane Katrina, in New Orleans, then you can imagine how the FDIC would handle a major banking crisis! Needless to say, the U.S. banking system is NOT the safest place to keep your money! To be cautious, keep only small amount of money in banks, or use one of the following services to identify the safest banks.
Money Market Funds:
These mutual funds hold short-term U.S. Treasury obligations, Government Agency paper, bank notes and CDs, as well as commercial paper. The safest short-term paper is that issued by the U.S. Treasury, so for the ultimate in safety, use only those Money Market Funds that invest exclusively in U.S. Treasury paper. About the only risk to these funds is if the mutual fund went bankrupt.
There are only two T-Bill-only MMFs left:
American Century Capital Preservation Fund
Dreyfus 100% U.S. Treasury MMF
The absolutely safest way to hold money within the U.S. financial system is to buy TBills directly from the U.S. Treasury. No commission is charged, and you can buy the TBills in $1,000 increments on line at: Legacy Treasury Direct. Interest earned on U.S. Treasury paper is also exempt from state income taxes!
By buying directly, you cut out the middle man, i.e. the mutual fund, which boosts your overall yield, and removes the remote danger that the fund holding your TBills might go bankrupt in a major financial crisis.
Insurance Policies and Annuities:
It is often hard to tell what stocks, bonds, and short-term paper an insurance company is holding to back up your policy or annuity. It should be obvious that some are safer than others. Some insurance companies purchased the toxic paper from the sub-prime mortgage brokers, so there is danger out there. If you have any concerns about your insurance products, check with Weiss Ratings.
Pension Plans and 401ks:
Avoid pension plan situations where a large percentage of the plan is invested in your company's stock, as it was at Enron. Most 401ks offer self-directed plans with a variety of choices, but few have safe U.S. Treasury-Only Money Market Funds.
There are ways to hold money outside of the financial system. Cash is an obvious choice, but if you keep or handle large amounts of cash, the government will become very suspicious of your activities. Even with these drawbacks, it is always a good idea to have some cash on hand! If ATMs and credit card readers were to go down for a few days, during a power black out, or other emergency, cash might be the only way you could buy anything.
Storing cash is a problem. If you keep it at home, you have to protect it from robbery, and make sure it doesn't burn up if your house does. There are a variety of hiding places, and safes available, and some people bury it in the back yard to avoid theft and fire. A safe deposit box is one alternative, but in a banking crisis, the government could seal all the boxes, as they did in the 1930s!
In addition, there is a remote chance that if there is enough underground cash, the Treasury could print a new currency, and force you to exchange your "old money" for its "new money". This has happened many times throughout history!
Junk Silver Coins:
These bags of old 90% silver coins offer another safe way to hold funds. They can be purchased at coin dealers such as Investment Rarities. Storing silver presents the same questions and problems as storing cash!
The best way for most people to own gold is through coins, with no numismatic value, such as the Canadian Maple Leaf or South African Krugerrand. These can also be purchased from dealers like Investment Rarities. Like cash and silver, there are issues of storage that must be dealt with. In the 1930s FDR confiscated all the gold, and it wasn't legal to own it again until the 1970s!
The ideal mix of safety precautions will vary for each person. It is usually best to keep only small amounts of money in banks, S&L's or Credit Unions, for day-to-day transactions, in a checking account, with the balance in a U.S. Treasury-Only Money Market Fund, and a Legacy TBill account.
It is not a bad idea to have some money out of "the system" in cash and/or junk silver and gold coins. Those with a taste for even more safety will often consider moving money to another country, such as Switzerland. The Swiss Banks allow depositors to hold money in any currency, or precious metals. Some will even let you buy stocks, bonds, and mutual funds in your account.
The Complete Guide to Swiss Bank Accounts by Harry Browne.
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