Housing Crash - Is Your Money Safe?

Fallout from the bursting of the housing bubble is rippling further and further out. In the last few days three state government funds have realized they are in big trouble and are experiencing "runs." And as a result, in the next few days we are likely to hear about the same thing happening in many other states. These are funds that cities put their cash into until it is needed to pay city employees, teachers, etc. The cities have people who understand finance watching the money, and they understood this so they started getting their money out. And because the fund had lost some of the money in mortgage-backed securities, it couldn't give money back to all of the cities, and had to say "no more withdrawals until this gets sorted out." The ones who asked for their cash first are OK, the ones who didn't will lose out.

This is exactly what could happen to money markets and banks as people realize this is their money everyone is talking about in the news. YOUR money. Find out where your money is, your parents' money, etc..

Florida moves to stop run on fund

The crisis underscores how the upheaval in credit markets could spread to affect mainstream investors, institutions and their employees. In recent weeks, local authorities in regions as disparate as Australia and Norway have reported similar problems.

[. . .] Most of the securities were short-term debt backed by mortgages and other assets, and issued by off-balance sheet investment vehicles, many of which have run aground in the credit squeeze. Lehman Brothers sold most of the distressed assets to the Florida fund, people familiar with the sales said.

and Florida freezes $15 billion fund as subprime crisis hits,

Florida halted withdrawals from a $15 billion local-government fund Thursday after concerns over losses related to subprime mortgages prompted investors to pull roughly $10 billion out of the fund in recent weeks.
. . . The decision shows how far this year's subprime-fueled credit crisis has spread. Florida's Local Government Investment Pool, which had more than $27 billion in assets at the end of September, is like a money-market fund that's supposed to invest in ultrasafe assets to provide participants with a secure place to stash spare cash. But even these types of funds have been hit by the widening crunch.
"It's spreading into areas that people didn't expect and this is a good example," Richard Larkin, a municipal bond expert at JB Hanauer & Co., said.

Maine Treasurer Criticizes Merrill for Subprime Bet,

Controversy is heating up in the state over who is at fault for having put $20 million, about 3 percent, of the state's roughly $725 million cash pool this summer into an investment fund called Mainsail II -- two weeks before its sterling ratings crumbled to junk.

The investment met all of the state's investment criteria, but exposed the state to the mortgage market-related losses that have roiled credit markets for a few months.

And Run on Montana Fund,

Montana school districts, cities and counties withdrew $247 million from the state's $2.4 billion investment fund over the past three days after officials said the rating on one of the pool's holdings was lowered to default.

But don't think for even a minute this is limited to state government funds. It's just that the municipalities that had cash in those funds understood what was happening. MANY holders of money, especially money-market funds are in exactly the same situation, except the depositors in money-market funds are not necessarily as sophisticated as municipal finance officers, and don't yet realize what all of this means.

But it is starting to hit the news.

How safe is your money market fund?,

The billions of dollars in subprime losses are now tainting a mainstay investment vehicle whose safety consumers take for granted: the money market mutual fund. Bank of America, SunTrust, Wachovia and Legg Mason are among the institutions reportedly taking steps to prop up money market funds that contained worrisome securities. . . .

[. . .] Many money market funds have sought higher-yielding investments such as subprime mortgage-backed securities. High-yield funds don't get those yields by investing in government securities. For instance, according to Money Fund Intelligence, the average yield for the top-yielding prime individual money market funds is 5 percent, while the average yield for the top-yielding Treasury individual money funds is 4.39 percent.

Is your money market fund safe?,

. . . if you have money in a fund that's exposed to subprime mortgages, consider finding one that has no commercial paper and shift your money to that.

In search of a security blanket,

Meet money manager Axel Merk... Recently, Merk took more than $100,000 of his personal savings out of money market funds. These funds take your cash and put it into highly rated -- and therefore, supposedly safe -- investments, giving you a set interest rate.

Problem is, some of them got entangled in the subprime mess. That's why Merk dumped his money market funds.

[. . .] You can't assume that all money market funds are safe. Remember, they're not insured by the FDIC. Now, banks do offer something called money market accounts. Just like savings accounts, they are protected by the FDIC, but they have a lower return.

That's right, this is a time to know where your money is. If you are not sophisticated enough to be reading a money-market prospectus - and you aren't - put your money in a bank up to the limits of FDIC insurance, or into treasury bills. Period. When everyone else is worried it will be too late to get your own money out. What do you have to lose by doing that? Why keep it where it is instead of getting it into a FEDERALLY insured back account, until all of this gets sorted out?

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Comments

[FreedomCorpse]

I guess my many pounds of bullion buried in the yard isn't such a bad thing. It was embarassing being laughed at when I bought the stuff, I was foaming at the mouth afraid of what the financial loons on wall street were doing, now its time for others to foam at the mouth.

[kdeen]

This morning on C-Span, Mr. Paulson, in his own words said, "We are in a recession".. Wonder who told him?

[Raven]

Umm, Dave, I have a newsflash for you.

No matter where their money is right now, if they've got it in a bank - or mutual fund or whatever - it's not safe. Not anymore.

Sure, the funds will lose first. But the banks - all of the banks - have unprecedented losses ahead of them.

Sure, FDIC protects that money in the bank.

But by the time we get to that point - and hold onto your seat because we're getting there - the dollars won't be worth a whole lot anyway. So stashing dollars away in US banks is still just moving the deck chairs around a little bit. Safer in the short term. But not safe.

After the housing bubble fully bursts, look for the credit card debt to follow. And there is not a bank in America who is prepared to deal with the kind of losses that will mean.

FDIC be damned. The money won't be there.

[robinhood1]

You'd think the people responsible for the Florida Local Investment Fund would have learned from the mistakes of Orange County, CA, which went bankrupt in 1994 because of bad investments by its local investment fund. But you'd be wrong. As PT Barnum once put it, there's a sucker born every day. Some of these local investment funds, which hold themselves out to be similar to money market funds, invest in debt securities going out as long as 5 years (not 13 months like a money market fund). What about the local investment funds of other states? What about public pension funds? It will take a while longer to find out where all these toxic mortgages are buried but the damage will be widespread.

[Sundialsvc4]

I do not agree with that wisdom; not at all.

First of all, "a run on a bank" gives you a handful of dollar-bills, but of what value are those dollar-bills versus all the spending that you made with a debit-card? No difference. Just don't spend more than you make; spend a little bit less.

Everything(!) in the financial market is, by definition, a "security" of some kind. And there is hardly a single transaction of any size that is made ... the purchase of even a modest car, to the purchase of an office-building ... that is not arranged in-part by "a security." There's nothing fundamentally wrong with the notion of "a security." There's just something very wrong about an economic system that is based on the exchange of dollar-bills instead of the exchange of goods.

We don't need to all make a mad-dash run on our friendly local neighborhoo mega-bank.

What we DO need to do is to recognize that a nation of 320 million people cannot operate itself based on the importing of boxes of stuff from countries 10,000 miles away, putting them on shelves in gigantic stores, and playing Christmas carols at whomever walks inside... while down the street the factory that used to be the lifeblood of this town remains shuttered.

In the 1950's, a man working at that factory really could provide for his family, and his wife didn't have to work if she didn't want to. If a part or supply needed by the factory was late, well, the truck or train's only travelling a few hundred miles... not thousands. There was something valuable about that strategy. It enabled this country to win a war by means of ... production.

[alkamm]

I imagine that the looming economic crisis will work itself out, but the real problem is not how individual investments can be salvaged. I'm sure to individuals, the sub-prime melt down is important, and I hope bloggers can get their money back, but the big problem is how this affects people without any money in the funds.
The usual suspects manipulate the money supply, the credit practices, the governmental financing, and then when their houses of cards fall, the little guys are hurt right along with the big guys.
Falling real estate values, depression, deflation, and all sorts of possibilities should be openly acknowledged. This mess has the ability to combine with climate change to ruin the world economic system much like the dust bowl and accompanying fall of the financial markets did.
It won't be the same, but the parallels are there.

[pigsatthetrough]

Not all of the subprime debt is related to those who should not have a mortgage. There was a practice to quick talk others into the variable rates products, even though they could have gone for much better. The 2008 renewals are three times what 2007 were.
The second important factor related to the fed is they will provide liquidity, drops in interest rates. There may also be a Federal move to freeze variable renewals.
The question is whether the real problems relate to 'liquidity or insolvency' problems.
Wall Street is definitely ignoring problems, while Main Street holds its breath.

[Henry]

http://www.nytimes.com/2007/12/02/business/02every.html?pagewanted=1&_r=1&ei=5089&en=ef788a58fa329f2a&ex=1354251600&partner=rssyahoo&emc=rss

You'd think the best and brightest of the NY City bonus babies would have seen this set of problems at the architectural level. But the buildings are up, the buildings are wavering, and no one knows! Hank Paulson (of the market discipline party) to the rescue, with a wink and a smile.
All lending should be local.

[Atticus]

Thank God it's only paper, not backed by gold or any hard commodity. That is why 1929 doesn't matter this time around.

Uncle Sam has lots of printing presses in our mints. He can feed the banks at will.

[Not Blind]

Traditional home loans offered safeguards, and followed "truth-in-lending" practices, to protect both buyers and lenders. Debt-to-income ratio, credit history, household income, and tax returns were scrutinized to determine a buyer's ability to assume a loan.
While unforseen situations arise: job loss, illness or death, etc., foreclosures and bankruptcies were far less.
Greedy real estate and mortgage brokers intent on their commissions, over-appraised property, falsified applicants'income, tased buyers with miniscule monthly payments, pushed ARM's and other slick deals to close the sale. They cared nothing about the circumstances to the borrower or lenders. Under-writers were pressured to approve loan applications they knew would be problematic.
There are still ads for low house payments ($200,000 for only $400/mo.) mailed or on the internet daily. Any one with a calculator can figure out a $200,000 loan at 6% would cost $1,000 monthly just interest, not counting impounds (taxes, insurance), let alone amortization of the principle. The shortfall of $600/mo. is added on to the principle, so there is negative equity accumulating. When a the value is over inflated, the borrower/buyer has an initial "paper" equity that disappears once real property values are compared. The buyers then get hit with sticker-shock when the ARM or initial sub-prime payments skyrocket to double or triple, only to discover their equity is negative, and they owe more than the home is worth. I can't blame them for walking away, as they've got nothing to lose.
The situation has already had a devastating impact on the general economy. Businesses are strapped (for cash) for needed improvements or expansion. Financial institutions have seen unprecidented losses, while their stock values decline. Investors in these types of funds are witnessing their portfolios decline rapidly, while the general economy is weakened by the loss of confidence.
We saw this with the de-regulation of the banking industry and the S&L's in the 80's and many corporations (Enron to name one). A few greedy, unscrupulous individuals reap grotesque profits, while pillaging from and defrauding consumers, their employees and investors.

[oldpotsmuggler]

The advice is faultless. On the other hand it's how a financial panic could get started, and the results of that could be devastating. I'm just saying.

Two points: Ratings agencies like Standard and Poors, Fitch, and Moodys were faced with a whole slew of fancy paper ("financial instruments") that they just plain could not understand, and rated them anyway. Often under the pressure of the issuers of the paper. All of that will be fun to watch as it plays out in the courts over time. Anyway, it's the ratings that were assigned to this paper that allowed it to be treated as being gold plated and made it eligible for holding in the funds involved. And it's the fact that too much of it has performed so poorly that proves that the agencies really weren't qualified to rate it.

The other point is that you are premature in making it sound like all of the money "in trouble" is lost money. Some portion, probably even the majority of it, is backed by assets which are still performing well. However, the paper in question is frozen exactly because the original ratings can no longer be trusted, making these things unmarketable. Unmarketable is not good, but it is not necessarily the same thing as not valuable. Efforts are being made to answer enough questions to get ratings completely reviewed and some of these "investments" will be completely wiped out, some will have lost some value, and some will be just as sound as originally advertised.

If I had been exposed, however, I'm sure that I would have done exactly what you are suggesting.