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Online Savings & Money Market Account Rates 2020

Online Savings & Money Market Account Rates

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Depositors Insurance Fund (DIF) Provides Protection to Funds to $1 Million for Some Massachusetts Savings Banks

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Many Massachusetts savings banks have additional insurance for deposit amounts to $1 Million from the Depositors Insurance Fund (DIF). Chartered in 1934, no depositor has ever lost a penny in a bank insured by both the FDIC and the DIF.

Deposit Insurance FundMany Massachusetts savings banks have additional insurance for deposit amounts above $100,000 from the Depositors Insurance Fund (DIF).  All deposits held in member banks above $100,000 are insured in full by DIF.  The location of the depositor or the branch does not impact the coverage. Thus, a resident of California that wants to open an account at a DIF member bank in Massachusetts is fully covered.  Out-of-state branches of a participating Massachusetts bank are also covered.

DIF not a government program but instead a privately funded program to protect the soundness of Massachusetts banks.  The DIF website states:

"The DIF has over $300 million in assets, plus an additional $100 million of reinsurance. During the recession of the early 1990s, the worst financial period in the history of the Massachusetts savings bank industry, the DIF paid out more than $50 million to protect over 6,500 depositors in 19 failed member banks. Yet the DIF emerged from this period financially stronger than before the recession began."

DIF reviews the financial statements of its member banks on a quarterly basis to ensure their soundness and is "examined annually by the Massachusetts Division of Banks and audited by an independent auditor."

A list of DIF banks is here

Fannie and Freddie Problems Could Impact Money Market Funds

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The recent problems with Fannie Mae and Freddie Mac roiled the mortgage markets but they also had the potential to impact many money market funds. The government acted to prevent a bigger problem in both.

Everyone at this point knows that Fannie Mae and Freddie Mac excercise a tremendous influence on the morgage market.  But they also play a large role in generating returns for money market funds.  One of the dangers of a collapse in either institution is that money market funds that invest in short term bonds from Fannie and Freddie could suffer losses.  Such losses would significantly undermine the financial system.

Money market funds, unlike money market accounts, are not FDIC insured.  They are short term investment vehicles and their money is invested in short term (typically less than 1 year) assets that are continued extremely safe - T-Bills, CDs, and Mortgage backed securities (generally bonds issues by Fannie and Freddie).  Because the government has implicitly backed both insititutions, the bonds from Fannie and Freddie are considered almost as safe as T-Bills, which are backed by the US government.

Marketwatch reports that:

"Peter Crane of Crane Data, publisher of the Money Fund Intelligence newsletter, noted that paper issued by government agencies represents about 11% of the roughly $3.5 trillion held in money funds. Paper from Fannie and Freddie is roughly one-fifth of that government-related paper. In absolute terms, it's a huge amount of dollars, but it means that just 2% of the average money fund portfolio is tied up in Fannie and Freddie."

Of course, that's just an average.  Some money market funds hold substantially more and some hold less.  And even a 2% loss in a money market fund is unacceptable to an investor who expects that there money is completely safe.

For now, Money Market funds appear to be safe.  As Peter Crane wrote on my previous post on money market funds: "But no retail investors has ever lost money in one [money  market funds].

But, as we learned with Auction Rate Securities, it's always wise to understand what's in your portfolio.  I personaly plan to take a look at my money market funds to see much exposure they have to Fannie, Freddie and other real estate related investments.  Since I believe housing will come down further, I want to make sure I understand my risks.

No Safety in Current Savings Rates

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In the current dreadful economic environment, online savings accounts may provide security of your principal (as long as you stay within FDIC limits), but the rates can fall out from under you in a second.

The current economic environment is pretty miserable and the only place to hide is in cash.

But, when you hide, don't rely on the interest rate that is advertised.  The reality is that there is no guarantee that you will be getting that rate from one day to the next. 

In this environment, banks will compete for deposits with one another on any given day.  The next day, the economy will deteriorate, short term treasuries will fall (as will expectations about a Fed rate hike), a bank or two may go under, and the rate that is being offered may fall.

Plenty of banks, including Countrywide and One United, have lowered their savings rates over the last couple of days.  As a result, short-term CDs are beginning to look like a much more attractive way to get through this period without seeing the interest rate that you are earning decline immediately.    The exception, of course, is the Everbank program, which is guaranteed for new depositors for 3 months (so is effectively a CD).