All America Bank 1.5%

Discussion of the Cash portion of the Permanent Portfolio

Moderator: Global Moderator

thisisallen
Senior Member
Senior Member
Posts: 126
Joined: Sat Sep 24, 2016 5:39 pm
Location: NJ and India

All America Bank 1.5%

Post by thisisallen » Mon Jul 10, 2017 9:25 pm

All America Bank Savings (Mega Money Market) acct is at 1.5%, max. $35,000.
User avatar
jhogue
Executive Member
Executive Member
Posts: 744
Joined: Wed Jun 28, 2017 10:47 am

Re: All America Bank 1.5%

Post by jhogue » Tue Jul 11, 2017 2:34 am

The current I bond rate is 1.96%. Max. $10,000 per SSN.

Yield of I bond currently beats money market funds, 4 year CD, and 5 year Treasury.

Less principal risk than FDIC - insured CDs or bank accounts.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
jhogue
Executive Member
Executive Member
Posts: 744
Joined: Wed Jun 28, 2017 10:47 am

Re: All America Bank 1.5%

Post by jhogue » Tue Jul 11, 2017 8:41 pm

MangoMan wrote:
jhogue wrote:The current I bond rate is 1.96%. Max. $10,000 per SSN.

Yield of I bond currently beats money market funds, 4 year CD, and 5 year Treasury.

Less principal risk than FDIC - insured CDs or bank accounts.
Yes, but you must hold I-bonds for 5 years minimum or face a penalty. So a more realistic comparison would be to a 5-year CD.

In any case, if short term interest rates rise, 1.9% will not seem like a good deal 2 years from now.
Nope.

1. You can redeem an I bond after a minimum of one year, forfeiting the most recent 3 months interest. The last CD I bought had a 6 month forfeiture (which is common.) Also, upon redemption, I bond earnings are exempt from state and local taxes. For CDs, the full interest payment is reportable as taxable income.

2. If short term interest rates rise over the next 2 years, the I-bond rate will reset 4 times (each November and May) in response to changes in the CPI. Know any CD that will reset 4 times, tax deferred, over the next 2 years?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
jhogue
Executive Member
Executive Member
Posts: 744
Joined: Wed Jun 28, 2017 10:47 am

Re: All America Bank 1.5%

Post by jhogue » Thu Jul 13, 2017 8:07 am

Dear pugstuff,

Like Harry Browne himself, I have lately come to the unfashionable conclusion that there is no substitute for US Treasury-backed securities—in cash as well as LTTs.

I don’t blame the OP for chasing yield with short term cash. Like many people on this forum, I have done it myself. Like a reformed smoker who can’t stand the smell of cigarette smoke, I now can’t stand the sight of big splashy ads in the Wall Street Journal for FDIC-backed money market accounts, CDs, and municipal bonds from great places like Puerto Rico and Cook County.

Speaking of this last perversion, don’t you hail from Illinois, home of the slow-motion state government default? You should be entertaining us all with anecdotes from the front lines.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
dualstow
Executive Member
Executive Member
Posts: 13152
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: All America Bank 1.5%

Post by dualstow » Thu Jul 13, 2017 1:16 pm

thisisallen wrote:All America Bank Savings (Mega Money Market) acct is at 1.5%, max. $35,000.
The Wall St Jrnl has an article about banks' reluctance to raise interest rates (nothing new), as long as depositors aren't bolting en masse. Right now, they are awash in deposits according to the article. Some bankers said it will take a few consecutive hikes from Yellen before they budge.

GS Bank (Goldman Sachs) is 1.2% last time I checked, and Ally is up to 1.15% I don't see anything at bankrate dot com today beating the above.
Let 2022 be the year of GOLD
不打不相識 \ https://youtu.be/FEX64-2Tphw
User avatar
sophie
Executive Member
Executive Member
Posts: 1902
Joined: Mon Apr 23, 2012 7:15 pm

Re: All America Bank 1.5%

Post by sophie » Fri Jul 14, 2017 7:25 am

With the increasing disparity in interest rates between online banks and the big brick and mortar shows, I'm surprised more depositors aren't bolting. I guess optimizing interest rates is not a game that most people play, and creating extra logins/downloading apps/etc is a barrier as well.

Ally's increases aren't that spectacular btw. They were at 0.99% savings account interest rate a year ago, so they've responded to a total 0.75% T bill/funds rate increase with an 0.16% rate hike. Better than most banks, but certainly not exactly passing the largesse to consumers. I did go for that 1.5% no penalty CD, which can be cashed out online in 2 business days - much quicker than getting money out of Treasury Direct or a brokerage. So I have kind of a two tier savings account with a combined interest rate of around 1.35%.

I'm with jhogue...money in banks for convenience, bulk of investment cash in T bills or savings bonds.
User avatar
dualstow
Executive Member
Executive Member
Posts: 13152
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: All America Bank 1.5%

Post by dualstow » Fri Jul 14, 2017 7:50 am

The reasons given for not bolting were A) after ten years of low rates, many Americans don't think of cash as an investment (they need to read Tyler's article!), and

B) "well, I have my checking at Chase, so I'll stick with them for everything."

But it did mention people who do what you mentioned in your last line.

Side note:
I just opened my first Ally account, but for checking not savings. I don't want the bank that holds my safe box to see any more checks to gold vendors. O0
Let 2022 be the year of GOLD
不打不相識 \ https://youtu.be/FEX64-2Tphw
User avatar
jhogue
Executive Member
Executive Member
Posts: 744
Joined: Wed Jun 28, 2017 10:47 am

Re: All America Bank 1.5%

Post by jhogue » Fri Jul 14, 2017 3:37 pm

MangoMan wrote:
jhogue wrote:Dear pugstuff,

Like Harry Browne himself, I have lately come to the unfashionable conclusion that there is no substitute for US Treasury-backed securities—in cash as well as LTTs.

I don’t blame the OP for chasing yield with short term cash. Like many people on this forum, I have done it myself. Like a reformed smoker who can’t stand the smell of cigarette smoke, I now can’t stand the sight of big splashy ads in the Wall Street Journal for FDIC-backed money market accounts, CDs, and municipal bonds from great places like Puerto Rico and Cook County.

Speaking of this last perversion, don’t you hail from Illinois, home of the slow-motion state government default? You should be entertaining us all with anecdotes from the front lines.
I agree on the Treasuries vs Munis. I have invested in Munis in the past when the taxable equivalent yield made it favorable, but I wouldn't touch them with a 10 foot pole now. However, I have no issues keeping the cash portion of my PP in online FDIC insured savings accounts that pay way better rates. Amigo, either you trust the US govt to keep its promises, or you don't.

I do live in Cook County, IL, and even though the state income tax isn't that high here compared to other states [it was 3.75%, but they just rammed through an increase to 4.95%], we have the highest sales tax in the country, probably the highest effective real estate tax [particularly on commercial property], and they just passed a beverage tax that will almost double the cost of a 2L bottle of soda [thank goodness I quit years ago]. It just never occurs to them to spend less and quit offering public employees such ridiculous benefits. No wonder everyone in IL NJ NY CA is flocking to Texas and Florida.
dear pugnacious,

1. I am glad to know that you have seen the light on the risk of owning municipal bonds. Keep that 10 foot pole!

2. Philosophically, I remain a staunch “splitter” rather than a “lumper” when it comes to the safety of the FDIC versus the US Treasury. I won’t bore you to tears with a peer-reviewed academic citation. Just consider the Cliff Notes version, courtesy of wikipedia:

“In light of apparent systemic risks facing the banking system, the adequacy of FDIC's financial backing has come into question. According to the FDIC.gov website (as of March 2013), ‘FDIC deposit insurance is backed by the full faith and credit of the United States government. This means that the resources of the United States government stand behind FDIC-insured depositors.’[50] The statutory basis for this assertion is unclear, however. Congress, in 1987, passed a "Sense of Congress" to that effect,[51] but such enactments do not carry the force of law.[52]”

I really am not trying to scare anyone with zero hedge- style doomer porn. I think all branches and agencies of the government would move heaven and earth to prevent another bank run like the 1930s. In preferring Treasury-backed securities over those insured by the FDIC, I am simply acknowledging the fact that the US Treasury is lender-of-last-resort and has financial tools that the FDIC does not.

3. I enjoyed your perspective on the situation in Illinois. Please start a new thread at once. We could begin by having a contest for the new thread title. I would like to kick it off with a couple of nominations:

-Sleepless in Chicago: The Emerging Black Market in Soft Drinks, or, How Regressive Can A Desperate State Get?

-Fear and Loathing in Springfield: Illinois’s Very Own Deep State At Work—Or Not
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
dualstow
Executive Member
Executive Member
Posts: 13152
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: All America Bank 1.5%

Post by dualstow » Fri Jul 14, 2017 3:45 pm

MangoMan wrote:
jhogue wrote:The current I bond rate is 1.96%. Max. $10,000 per SSN.

Yield of I bond currently beats money market funds, 4 year CD, and 5 year Treasury.

Less principal risk than FDIC - insured CDs or bank accounts.
Yes, but you must hold I-bonds for 5 years minimum or face a penalty. So a more realistic comparison would be to a 5-year CD.

In any case, if short term interest rates rise, 1.9% will not seem like a good deal 2 years from now.
No Pugsley,

As you can clearly see from the red text, you said nothing about a penalty (in red), and brazenly stated that you must hold I-bonds for 5 years in any case.
Let 2022 be the year of GOLD
不打不相識 \ https://youtu.be/FEX64-2Tphw
User avatar
sophie
Executive Member
Executive Member
Posts: 1902
Joined: Mon Apr 23, 2012 7:15 pm

Re: All America Bank 1.5%

Post by sophie » Sat Jul 15, 2017 8:55 am

Not sure why the confusion about I Bonds? Yes, you can sell them after holding for one year (or 11 months 1 day if you buy at the end of a month). If you sell before 5 years you forfeit 3 months interest, which is exactly the same penalty that virtually all CDs carry.

If you look at short term interest rates vs. inflation, they tend to remain in the same ballpark - cf Tyler's article about cash investments. In any case it's highly unlikely that interest rates will get much higher than inflation, so there's very little risk that I Bonds will lag CD rates by much. If they do, you could probably win big by scoring some I Bonds with a high fixed rate.

I also look forward to a thread about Illinois! New York is not too different, just with deeper pockets so they are able to balance the budget. It's the same problem though, a city/state that loves to spend money and could care less about high taxes. To some degree I agree with that philosophy, if it translates to city services that save me money and increase quality of life e.g. good parks & working subway system, but mostly it's going to pensions for people who spend 20 years running a subway elevator and then retire at 45. That's just plain insulting. I'm amazed there isn't more of a backlash going on.
User avatar
dualstow
Executive Member
Executive Member
Posts: 13152
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: All America Bank 1.5%

Post by dualstow » Sat Jul 15, 2017 9:01 am

sophie wrote:Not sure why the confusion about I Bonds?
Just to be clear, I was making a joke after seeing pug's green font. I think everyone is in agreement on the I bond holding period. O0
Let 2022 be the year of GOLD
不打不相識 \ https://youtu.be/FEX64-2Tphw
User avatar
Kriegsspiel
Executive Member
Executive Member
Posts: 3982
Joined: Sun Sep 16, 2012 5:28 pm

Re: All America Bank 1.5%

Post by Kriegsspiel » Sat Jul 15, 2017 9:06 am

sophie wrote:I also look forward to a thread about Illinois! New York is not too different, just with deeper pockets so they are able to balance the budget. It's the same problem though, a city/state that loves to spend money and could care less about high taxes. To some degree I agree with that philosophy, if it translates to city services that save me money and increase quality of life e.g. good parks & working subway system, but mostly it's going to pensions for people who spend 20 years running a subway elevator and then retire at 45. That's just plain insulting. I'm amazed there isn't more of a backlash going on.
There is a good deal of smoldering resentment among the young. A ladyfriend and I have been having a running malevolence about these stupid promises. Especially in Illinois, where she lives.
User avatar
jhogue
Executive Member
Executive Member
Posts: 744
Joined: Wed Jun 28, 2017 10:47 am

Re: All America Bank 1.5%

Post by jhogue » Sat Jul 15, 2017 9:23 am

dualstow wrote:
MangoMan wrote:
jhogue wrote:The current I bond rate is 1.96%. Max. $10,000 per SSN.

Yield of I bond currently beats money market funds, 4 year CD, and 5 year Treasury.

Less principal risk than FDIC - insured CDs or bank accounts.
Yes, but you must hold I-bonds for 5 years minimum or face a penalty. So a more realistic comparison would be to a 5-year CD.

In any case, if short term interest rates rise, 1.9% will not seem like a good deal 2 years from now.
No Pugsley,

As you can clearly see from the red text, you said nothing about a penalty (in red), and brazenly stated that you must hold I-bonds for 5 years in any case.
dualstow,

To be fair to MangoMan, I recognize that my comparison of the current I bond yield (1.96%) to the OP’s money market fund “great rate” (1.50%) was inexact. It had to be because I bonds are unique and don’t compare-- apples-to-apples-- to any other financial instrument. I wanted to demonstrate that you don’t need to abandon the safety of Treasury-backed securities just to stay competitive with yields for cash in the PP.

Short term rates have been crushed so low for so long that investors have grown schizophrenic about their cash. On the one hand, prudence has been displaced by yield chasing of the sort exhibited by the OP: Who cares about arcane stuff like credit risk, when I can get my hot little hands on an additional 0.22% by locking up my $35,000 for the next 12 months (net a whopping $77/year!!!) [compared to a 1 year Treasury bill @ 1.28% (7/9/17)].

On the other hand, legions of savers and investors have gone without meaningful returns for so long that they have simply thrown in the towel, thrown out their monthly statements, and let their TBTF mega-banks pretend that they did not hear that Janet Yellen has been raising interest rates. The article you cited on the front page of Thursday’s Wall Street Journal (“Bank Deposits Don’t Pay,” 7/13/17) is eye-opening evidence of just how extensively that despair has penetrated into our financial culture.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
dualstow
Executive Member
Executive Member
Posts: 13152
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: All America Bank 1.5%

Post by dualstow » Sat Jul 15, 2017 9:29 am

Absolutely agree. I should have added that I really appreciate your posts in this thread. I do.
I hope that 6-month treasury bills and, say, Vanguard's prime money market will catch up with inflation, which is what- 1.6-2% ?
Not a lot of hope for banks.
Let 2022 be the year of GOLD
不打不相識 \ https://youtu.be/FEX64-2Tphw
User avatar
jhogue
Executive Member
Executive Member
Posts: 744
Joined: Wed Jun 28, 2017 10:47 am

Re: All America Bank 1.5%

Post by jhogue » Sun Jul 16, 2017 2:09 pm

dualstow wrote:Absolutely agree. I should have added that I really appreciate your posts in this thread. I do.
I hope that 6-month treasury bills and, say, Vanguard's prime money market will catch up with inflation, which is what- 1.6-2% ?
Not a lot of hope for banks.
Thanks, dualstow. I guess I am using this forum to vent about the perils of neglecting cash, the busiest asset in the PP.

I trust that the TBTF mega-banks will not ask what is good for savers and investors—any more than my grandmother would think of asking the chickens on her farm if they would like to come to dinner on Sunday afternoon.

Your concern about the threat of inflation to cash reminds me of when I got my very first money market account way back in 1981. Federal Reserve chairman Paul Volcker had just declared war on inflation and jacked up short term rates to unprecedented levels. I think the rate of my brand-new Dreyfus MMA topped out at a still-astounding 20%! (very temporary, of course) My conventional bank savings account never came close to catching up and eventually—I can’t even remember when-- I stopped using a bank savings account altogether.

Financial innovations like money market accounts, index funds, brokerage accounts offering free trades of Treasury bonds, ETFs, and, yes, I bonds, have given the small saver and investor many more financial tools to deal with the fluctuations in economic cycles. Maybe the most valuable innovation of all is the creation of forums like this one that encourage the growth of the free exchange of ideas.

Tyler’s recent research in another thread also provides good evidence and gives me hope that that cash can keep up—if we pay attention.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
dualstow
Executive Member
Executive Member
Posts: 13152
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: All America Bank 1.5%

Post by dualstow » Sun Jul 16, 2017 3:17 pm

Of course the chickens are invited to Sunday dinner!
Fine print: they'll be seated on a plate, not a chair. O0
Your concern about the threat of inflation to cash reminds me of when I got my very first money market account way back in 1981...

I'm just watching; not overly concerned. We had a regular poster here, MachineGhost (a.k.a. MG) who, between very bombastic and entertaining posts about other things, had info like "treasury bills have kept up with inflation except for such and such period, when they trailed by a mere 1%." I looked it up, and he was right. That along with the cash article at portfoliocharts dot com, made me feel a whole lot better about the cash portion.

In general, I'm fine with low yield and low inflation. I'll let the Fed worry about what % inflation is good for us.
Let 2022 be the year of GOLD
不打不相識 \ https://youtu.be/FEX64-2Tphw
User avatar
jhogue
Executive Member
Executive Member
Posts: 744
Joined: Wed Jun 28, 2017 10:47 am

Re: All America Bank 1.5%

Post by jhogue » Mon Jul 17, 2017 9:13 am

dualstow,

What happened to Machine Ghost? For a while he was a prolific poster on this forum, and lately seems to have vanished – like a ghost?

I enjoyed his posts, but also sometimes found them a bit cryptic, as though I needed an explanatory preamble before diving into his more technical missals.

He also seemed to exhibit an obsessive compulsive disorder at times, especially when it came to the subject of Maximum Drawdowns in back testing the PP. Personally, I thought I had pretty much found out everything I need to know about maximum drawdowns by living through the 2008 crash and watching my 90/10 portfolio drop by 41%.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
dualstow
Executive Member
Executive Member
Posts: 13152
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: All America Bank 1.5%

Post by dualstow » Mon Jul 17, 2017 9:16 am

jhogue wrote:dualstow,

What happened to Machine Ghost?
I think TennPaGa said he's active on another forum. Where is he, Tenn?
Let 2022 be the year of GOLD
不打不相識 \ https://youtu.be/FEX64-2Tphw
User avatar
dualstow
Executive Member
Executive Member
Posts: 13152
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: All America Bank 1.5%

Post by dualstow » Mon Jul 17, 2017 10:07 pm

Yes, read my explanation above, between Sophie's and Kriegspiel's posts.
Let 2022 be the year of GOLD
不打不相識 \ https://youtu.be/FEX64-2Tphw
User avatar
dualstow
Executive Member
Executive Member
Posts: 13152
Joined: Wed Oct 27, 2010 10:18 am
Contact:

Re: All America Bank 1.5%

Post by dualstow » Mon Jul 17, 2017 10:11 pm

MangoMan wrote:
dualstow wrote:Yes, read my explanation above, between Sophie's and Kriegspiel's posts.
Ah, yes, I zoned thru that post apparently.
Funny, when I wrote the red font post, I thought, no one is going to not know that I'm joking! :D
Let 2022 be the year of GOLD
不打不相識 \ https://youtu.be/FEX64-2Tphw
LC475
Executive Member
Executive Member
Posts: 427
Joined: Tue Oct 08, 2013 4:23 pm

Re: All America Bank 1.5%

Post by LC475 » Tue Jul 18, 2017 11:43 am

thisisallen wrote:All America Bank Savings (Mega Money Market) acct is at 1.5%, max. $35,000.
Thanks for posting, Allen!

I am always skeptical of these high rates, though. Since free lunches are few and far between in this world of ours, something about giving me a higher-than-average rate makes a bank seem higher-than-average risky. The "too good to be true" factor, I suppose.
MangoMan wrote:However, I have no issues keeping the cash portion of my PP in online FDIC insured savings accounts that pay way better rates. Amigo, either you trust the US govt to keep its promises, or you don't.
Not all promises are equal. Not all promises have identical consequences to the promisor if broken.

It's nice to be promised something by the US Government. The question we should be asking ourselves whenever this occurs, however, is something like "Do I look, to the Government, like a drunken minor Indian Chief?" I.e.: expendable.

It would be harmful to their long-term credibility if the gov't decided to not back up their FDIC "guarantees."

It would be fatal to their ability to borrow money at reasonable rates if the gov't decided to default on Treasury Notes.

Two promises. Miles apart.
User avatar
drumminj
Executive Member
Executive Member
Posts: 319
Joined: Wed Jul 22, 2015 9:16 pm

Re: All America Bank 1.5%

Post by drumminj » Wed Jul 19, 2017 10:46 pm

LC475 wrote: It would be fatal to their ability to borrow money at reasonable rates if the gov't decided to default on Treasury Notes.
Would it really, though? How much of the purchases of gov't debt is from our central bank, or foreign central banks (with printed dollars) vs those who can't conjure money out of thin air?

In the past, I agree with you. In this day and age, I'm not sure that's quite as true...
User avatar
Desert
Executive Member
Executive Member
Posts: 3565
Joined: Sat Jun 26, 2010 2:39 pm

Re: All America Bank 1.5%

Post by Desert » Wed Jul 19, 2017 11:09 pm

LC475 wrote:
thisisallen wrote:All America Bank Savings (Mega Money Market) acct is at 1.5%, max. $35,000.
Thanks for posting, Allen!

I am always skeptical of these high rates, though. Since free lunches are few and far between in this world of ours, something about giving me a higher-than-average rate makes a bank seem higher-than-average risky. The "too good to be true" factor, I suppose.
MangoMan wrote:However, I have no issues keeping the cash portion of my PP in online FDIC insured savings accounts that pay way better rates. Amigo, either you trust the US govt to keep its promises, or you don't.
Not all promises are equal. Not all promises have identical consequences to the promisor if broken.

It's nice to be promised something by the US Government. The question we should be asking ourselves whenever this occurs, however, is something like "Do I look, to the Government, like a drunken minor Indian Chief?" I.e.: expendable.

It would be harmful to their long-term credibility if the gov't decided to not back up their FDIC "guarantees."

It would be fatal to their ability to borrow money at reasonable rates if the gov't decided to default on Treasury Notes.

Two promises. Miles apart.
You may be right, or you may be wrong. When it comes to end-of-republic promises, I won't put much value in FDIC or treasury promises. The most likely scenario would be inflating away the obligations, in which case both would suffer more or less equally.
User avatar
jhogue
Executive Member
Executive Member
Posts: 744
Joined: Wed Jun 28, 2017 10:47 am

Re: All America Bank 1.5%

Post by jhogue » Thu Jul 20, 2017 7:38 am

Sorry Desert, but I will have to disagree. The differences between the powers of the FDIC and the US Treasury can and do matter in practice, even short of an end-of-the world-as-we-know-it scenario.

Pugchief himself provided a personal example of this back in 2013 on this forum, when he described what happened to his small business account at a banking subsidiary of Washington Mutual (WaMu) in 2008, which just so happens to have been the largest bank failure ever handled by the FDIC.

On the one hand, you could say that the FDIC did its job—preventing a bank run and ensuring banking liquidity-- and did it reasonably well. Pugchief’s WaMu account, insured by the FDIC, was taken over by JP Morgan Chase and I gather from his telling that he did not lose so much as a nickel in the transaction. Bankers at Chase even promised to grandfather his account features.

On the other hand, what ensued illuminates the limitations of the FDIC, and the powers of the Treasury. About a year after Chase took over his failed WaMu account, Pugchief got a letter from his new bankers announcing that his account was being “converted,” and they thoughtfully included a new fee structure that bore little resemblance to the account that Pugchief had with WaMu. It seems that his new FDIC-insured TBTF mega bank had up and decided to milk Pugchief like he was one of my grandfather’s Holsteins! Rightly indignant, Pugchief promptly moved his account to yet another bank.

As I suggested, the FDIC did its job, but it came at a price, both to Pugchief and the American economy. Time is money. The time that Pugchief spent juggling three different banks in a year was time better spent tending to his dental practice or getting a good night’s sleep. Those sorts of costs get swallowed up in the larger economic picture, but they are real nonetheless—especially to Pugchief. The larger costs are still being sorted out to this day. The WaMu bank failure was so large compared to the FDIC’s insurance fund that the agency decided to conduct a secret auction of its banking assets, which JP Morgan Chase won. Lawyers for WaMu later contested the terms of the buyout, arguing that the FDIC had conducted an unnecessary fire sale of its assets. (The case is still in litigation nine years later). Following the WaMu episode, the U.S. Treasury effectively bailed out the FDIC by granting it a new $100 billion line of credit to make sure it could handle bigger bank failures in the future.

Morals of my story?

1. If Pugchief had a Treasury money market fund instead of an FDIC-insured account with solid institutions like WaMu and Chase, he would not have had to change banks three times in a year and waste his time listening to some slick Chase banker explain why getting milked like Grandpa’s cow was actually a feel-good kind of experience for everybody involved.

2. Harry Browne was right. For your PP cash, nothing beats U.S. Treasurys
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
Desert
Executive Member
Executive Member
Posts: 3565
Joined: Sat Jun 26, 2010 2:39 pm

Re: All America Bank 1.5%

Post by Desert » Thu Jul 20, 2017 8:58 am

jhogue, that was a great post. I will ponder that. I also will work to get the image of your grandfather's Holsteins out of my mind. :)

But seriously, that's a very convincing post that will make me think through this decision in more detail.
Post Reply