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CASH

Trouble comes to cash

>> Time was when you could put thousands of dollars into a money market account or a bank certificate of deposit (CD) and never give it a second thought. Cash was safe. That time stopped when big banks started going bankrupt, beginning with Countrywide Financial in 2007 and IndyMac in 2008, followed by trouble at the money market fund, Reserve Fund, which reported a per-share value of 97 cents in September, 2008. It was only the second time in history that a money market fund had “broken the buck.”

And the trouble continues: Early in the fourth quarter, the number of banks taken over by the Federal Deposit Insurance Corporation rose to over 130. That works out to an average of 2.7 banks a week for 10 months.

Is your bank next? Is nothing safe anymore? Well, big banks seem to be better off now than in the early months of the year. Wells Fargo and Bank of America reported respectable second quarter profits. But some analysts are unimpressed, noting that at least some of the profits came from banks being allowed to value their dubious assets at whatever level the banks themselves considered fair. Like Humpty Dumpty, banks are saying that words (and numbers) mean whatever they want them to mean.

Self-defense: As usual, the answer is to shop around. A good place to start is www.highyieldcheckingdeals.com. There you’ll see a list of banks and credit unions that offer rates up to 6 percent on FDIC-insured “reward checking accounts.” Alternatively, or in addition, you can put cash in a bank CD or in a money market mutual fund. If you choose a CD, your money is FDIC insured up to $250,000, but you have to keep your money there for a specified period of time, or pay a penalty for early withdrawal.

Money in a money market fund is not necessarily insured, although it’s usually invested in kinds of securities thought to be safe, such as U.S. government securities, commercial paper, and certificates of deposit. Generally, there is no penalty for withdrawing money at any time, and owners can write checks against their accounts.

The bank CD option used to be a simple matter of finding which bank pays the highest rate. Now we have to add, “How safe is the bank?” (Yes, the FDIC insures our deposits up to $250,000. But nobody wants the paper work that follows a bank failure.)

One source of answers is BankRate.com. Start with www.bankrate.com/cd.aspx to find a bank with an attractive rate, locally or nationally. Then go to the “safe-sound” portion of the site, where a bank’s financial solidity is shown by a number of stars. Another good site (owned by BankRate.com) is www.bankaholic.com, which covers credit cards and insurance, in addition to banks.

You can also buy CDs from a brokerage firm, which allows you to have CDs with different maturities in the same account. Brokerage firms may offer you something called “indexed” or “market rate” CDs. These securities give you limited participation in stock market gains when the markets go up and, at the same time, guarantee you can get your original investment back if the markets go down. Sounds wonderful. But before you reach for your wallet, realize there’s a chance you could hold one of these CDs for years and then, when you want to take your money out, receive no interest on your initial investment. Also, be sure to read the fine print for details that may not work in your favor.

For money market funds, BankRate.com is again the quickest and most useful site. It offers more data at a glance than other sites that compare money market funds.

Worries about the solvency of these funds were alleviated in September, 2008, when the Treasury Department and Federal Reserve took several steps to assure the financial solidity of money market funds.

 

How to find a good rate and a safe place for your cash.

 

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