Terry Coxon: "FDIC-insured bank deposits may be a better bet than T-bills"

[Gumby]

So if I understand the scenario you think took place at MF Global, it went down like this.  You believe that MF Global (allegedly) maintained a pool of T-bills with this same CUSIP number that is (allegedly) too small to account for all the outstanding such T-bills in customer's accounts.  (Allegedly.)  That would mean that the books for this individual security type were cooked, right?  That means making fake interest payments on time for securities that do not exist.

Well, it's probably not that simple. The latest I've heard is that these were segregated accounts that were typically held to cover margin calls. The latest figure now stands at a staggering $1.5 billion stolen. Since entire accounts have gone missing, this means that T-Bills and cash had to have been stolen as well. (I mean, what are the changes that $1.5 billion in lost accounts didn't hold some T Bills?).  

Now, my understanding is that a large portion of the contents of these accounts were commodities. But, these segregated accounts obviously had some cash as well. And my understanding is that the firms and brokers that have access to these kinds of segregated accounts will typically pocket the interest from the Treasuries. It's just the way these accounts seem to work — and it's how Wall Street usually makes their money off these accounts:

http://www.theburningplatform.com/?p=24368

If the clients weren't expecting any interest, than that might have made it easier to steal the funds. But, in many ways, what MF Global did was worse than "borrowing" 'street name' investments because the accounts were supposed to be segregated:

http://www.marketswiki.com/mwiki/Segregated_account

[Lone Wolf]

Well, it's probably not that simple. The latest I've heard is that these were segregated accounts that were typically held to cover margin calls. The latest figure now stands at a staggering $1.5 billion stolen. Since entire accounts have gone missing, this means that T-Bills and cash had to have been stolen as well. (I mean, what are the changes that $1.5 billion in lost accounts didn't hold some T Bills?).  

It's up to $1.5 billion now??  We're going in the wrong direction!

I see where you're coming from given the sheer scale we are looking at.  I guess we'll know more as time goes by when we learn more about the composition of these accounts and what on Earth happened to them.  I knew that a lot of "money" (cash?) was missing but I hadn't heard that entire accounts had vanished.  What happened to all that dough?

It's going to be fascinating watching this unfold.  I can guarantee that "fascinating" is not the word that I'd use to describe this if it were my money missing, though, I can tell you that much.

[AdamA]

So having had all this discussion, what are people's opinions on the best way to hold cash in the PP?

[murphy_p_t]

am i naive in thinking that being in Vanguard and/or another (discount) self-directed brokerage account you avoid these issues?

particularly if I hold treasury only MMF or own 30 year US govt bonds purchased thru the bond desk at Vanguard?

the (discount) brokerage business model is not based on trying to beat the market...they simply execute trades...right?

I can be as skeptical / cynical / doubtful as the best of them, but aren't we comparing apples & oranges here?  MF Global is certainly not a discount brokerage.

[Lone Wolf]

am i naive in thinking that being in Vanguard and/or another (discount) self-directed brokerage account you avoid these issues?

particularly if I hold treasury only MMF or own 30 year US govt bonds purchased thru the bond desk at Vanguard?

I tend to view it this way as well, although it certainly seems smart to keep your holdings somewhat spread around.  If you are fortunate enough to be anywhere near the SIPC limit, then this would pretty much be mandatory IMO.

So having had all this discussion, what are people's opinions on the best way to hold cash in the PP?

Personally, I like a mix of the following:

• I-series savings bonds
• Pre-2012 EE-series savings bonds
• 0-3 year Treasury Bill and Note ladders built at discount brokerages
• Cold, hard cash in a safe deposit box or safe
• Modest slice of FDIC-insured checking and HYSA for convenience

Although I don't like it, I'm persuadable on a Treasury Ladder built at TreasuryDirect.  Currently, though, I really hate the idea of having to snail mail a government form in order to get the T-bills transferred someplace I could actually use them.

Also, even though I hold a small slice of cash in FDIC accounts, I have to respectfully disagree with Terry Coxon that FDIC-insured bank deposits are less risky than T-bills.  I think Browne clearly had this one right.  If the US government defaulted on T-bills, it would shake the US banking system to its core.

[AdamA]

So it seems like there may be some logic to splitting (maybe not 50/50%) your cash holdings between a treasury MMF and an FDIC insured bank account.

The treasury MMF will protect from credit default and the FDIC account should protect you from fraud/theft  within the brokerage. 

[Gumby]

So it seems like there may be some logic to splitting (maybe not 50/50%) your cash holdings between a treasury MMF and an FDIC insured bank account.

The treasury MMF will protect from credit default and the FDIC account should protect you from fraud/theft  within the brokerage.

I doubt Harry Browne would agree with that logic. He would have recommended that approach if he truly believed that FDIC accounts could be safer than Treasury Money Market Funds. But, he didn't advocate that kind of approach, and he explained his reasoning very clearly.

He believed that theft, fraud and credit default would be greatest during the times when you need those accounts the most. He was very specific about getting as close to direct ownership as possible. I'm not sure how else to relay that.

If brokerages are taking part in fraud/theft, then it's likely that the FDIC accounts will be under tremendous pressure as well (i.e. a run on the banks, agency debt failures, etc.). And that's when banks, and the FDIC, would probably fail.

It doesn't mean you can't deviate from that recommendation. You just need to understand the risks involved.

The banks and Wall Street are all interconnected. The only way to get outside of the system — and its potential for a financial cancer — is to use TreasuryDirect or hold paper cash. Obviously this isn't very convenient. So, do what makes sense for you.

[moda0306]

LW,

Did we figure whether the 20-year doubling was or wasn't available for electronic EE bonds, whether bought now or going forward?

I reallly hope they hold onto that feature.

[AdamA]

I'm not sure how else to explain this.

You've done a good job explaining. 

It seems like it makes sense to use Treasury Direct, when possible. 

I don't see where it would be that inconvenient...just doesn't work for retirement accounts.

[Lone Wolf]

Did we figure whether the 20-year doubling was or wasn't available for electronic EE bonds, whether bought now or going forward?

Good question!  The EE bonds that I bought this year (and years prior) have that feature.

From what I see here at the TD website, I don't see any indication that feature has been canceled:http://www.treasurydirect.gov/indiv/res ... dterms.htm.

Here's the relevant bit:

At a minimum, the U.S. Treasury guarantees that an EE Bond's value will double after 20 years, its original maturity

Hopefully it'll still be around next year!  I remember that someone pointed out some ominous-sounding text a while back but can't remember how clear it was.

The issue we'll still face is the lack of opportunity for paper bonds.  But we'll do what we can.

It seems like it makes sense to use Treasury Direct, when possible.  

I don't see where it would be that inconvenient...just doesn't work for retirement accounts.

My concern would be the "lack of agility" you'd experience trying to sell.  If you have to fill out and mail in a government form to get your T-bills transferred someplace where you can liquidate them, it doesn't feel very much like "cash" to me.

[moda0306]

Good point LW... there seem to be two broad considerations here: 1) Will I keep nominal value through whatever crisis ensues?, and 2) will I be able to access cash during said crisis?

The first is the more broad important factor, but we like to actually feel like we can USE our cash in time of crisis.

The latter is appearing to be a difficult thing to get our heads around.  I think with every account we not only have to look at fraud but the "institutional path" to actually getting cash.

Most of the institutions that we'd normally count on to get our treasury $$'s are tainted in this hypothetical "crisis world" we're imagining.  I would trust that the gov't would keep the mail system running, but it could be days while you wait for the cash, and at this point one would think the treasury would be overloaded with requests like ours far beyond what they're prepared for in today's world.

So while I like treasury direct for being able to hold cash nominal value through a crisis, its usability is flawed due to the delay and potential systemic issues with them getting hundreds of thousands of requests for checks in their doors in a few days with few employees to handle it might be a big problem.

I almost think that we should put a cognitive box around any cash in the form of 1's and 0's as potentially inaccessible during a crisis, but at least holding its value through it (if properly placed), and act accordingly by doing what we've discussed and holding plenty physical cash, both in a safety deposit box and in our homes.

That said, if a bank was "closed" due to not having enough deposits to meet withdrawal demands, are they still going to be opening their doors to safety deposit box holders?  I'd imagine so, but the bank might be too scared of angry customers and just close their doors altogether... pure speculation here I'm just trying to think through it.

[moda0306]

PS, I've asked a question of  treasury direct employee and they got back to me within a few days via email with very detailed and clear information.

I'll do the same regarding EE bonds and get this 20-year doubling figured out once and for all.

[Lone Wolf]

So while I like treasury direct for being able to hold cash nominal value through a crisis, its usability is flawed due to the delay and potential systemic issues with them getting hundreds of thousands of requests for checks in their doors in a few days with few employees to handle it might be a big problem.

You're right, and I see it as even being a bit worse than that.  If I understand the process correctly, you're not getting a check from TD.  What you mail to them is a form requesting that they transfer your T-bills to some other brokerage.  Once they are in this new brokerage you can then sell them.  It just seems like a lot of steps, none of which I'd enjoy very much if I needed to rebalance (let alone if we found ourselves in some kind of heart-pounding crisis.)

Maybe it's not as bad as it sounds, though.  Having not actually gone through such a TD transfer myself, perhaps it's a smoother process than it sounds.  I'm always a bit skeptical that any process that contains the words "mail" and "government" will be very rapid. 

[MediumTex]

Maybe it's not as bad as it sounds, though.  Having not actually gone through such a TD transfer myself, perhaps it's a smoother process than it sounds.  I'm always a bit skeptical that any process that contains the words "mail" and "government" will be very rapid. 

It's all relative.

I'm sure if you compared the process above to the growth of an oak tree or the movement of a glacier it would look like Speedy Gonzales on crack.

[moda0306]

Does anybody have any knowledge of safe deposit box access during the depression?? If banks were facing mobs of deposit seekers and decide to close doors, what access do safety deposit box holders have?

I ask this because I'd think one would want to hold some of there physical gold & cash there.

[MediumTex]

Does anybody have any knowledge of safe deposit box access during the depression?? If banks were facing mobs of deposit seekers and decide to close doors, what access do safety deposit box holders have?

I ask this because I'd think one would want to hold some of there physical gold & cash there.

I don't know how useful anything that happened during the Depression would be today.

In general, I think that people don't have many tangible assets that are worth much anymore since consumer products become obsolete so quickly and globalization has made things that used to be pretty expensive much cheaper.

There is also the matter of the money itself being basically worthless from an intrinsic value perspective (with the notable exception of nickels, which are worth about 6 cents based on their metal content).

Thus, if you looked at what the average person actually owns you would find that it's not very much.  Maybe a little jewelry, maybe a little equity in a car or a house, but that's often about it.  In other words, the number of people who actually own anything worth putting in a safe deposit box is pretty small.  As far as having access to the box in a panic, it seems like any bank closings would be temporary (since a panic associated with a bank closing only gets worse the longer the bank is closed).  When the bank reoponed you could go get the contents of the box (if that is what you wanted to do).

I was reminded of this issue of people not actually owning very much when I refinanced my home recently.  I listed my retirement accounts and non-retirement investment accounts.  The fellow who was reviewing my file asked me if the investment accounts were IRAs and I said no.  He acted like he very rarely saw brokerage accounts that were not tax deferred accounts.

[Gumby]

The biggest risk to a safe deposit box is probably forgetting about it. If you forget to pay your annual bill, and they see that you haven't accessed your box in awhile, the state will typically seize it as "unclaimed" property. So, if you do get a safe deposit box, make sure you actually visit it a few times a year and pay your bill in a timely fashion.

As far as owning "street name" bonds vs. TreasuryDirect goes, I think the most convenient option is to do what Harry Browne said in his books. He obviously thought about this a lot.

The easiest and most convenient way to minimize risk is to own T-Bills through two (or more) different brokerages. Yes, your "street name" bonds might get stolen, or delayed, but it's unlikely that your investments and cash will go missing at two different brokerages. Having some cash in TD and some in paper cash as well are extra protections that may help you sleep better at night.

So... Brokerage Diversification is probably the best bet — just as HB recommended.

[AdamA]

My concern would be the "lack of agility" you'd experience trying to sell.  If you have to fill out and mail in a government form to get your T-bills transferred someplace where you can liquidate them, it doesn't feel very much like "cash" to me.

I used TD for a brief time last year.  I didn't have to fill out any paperwork.  When the T-bills expired, the money was deposited into my bank account.  This doesn't have to happen, you can just keep rolling over the T-bills if you want. 

You could simply buy very short term T-bills (like 7 days) and then if you needed the cash, just opt out of the rollover.

[Gumby]

I used TD for a brief time last year.  I didn't have to fill out any paperwork.  When the T-bills expired, the money was deposited into my bank account.  This doesn't have to happen, you can just keep rolling over the T-bills if you want.  

You could simply buy very short term T-bills (like 7 days) and then if you needed the cash, just opt out of the rollover.

Right. He's just referring to a situation where he might need to sell some 6 month T Bills in a pinch. Then you would need to mail in a form and have them transferred to your brokerage for selling.

[WildAboutHarry]

Right. He's just referring to a situation where he might need to sell some 6 month T Bills in a pinch. Then you would need to mail in a form and have them transferred to your brokerage for selling.

There is a way to minimize the need for redeeming T-Bills in a pinch.

If you match your T-Bill ladder rungs to the maturity of the bills then up to 1/12 (1-year), 1/6 (six month), or 1/3 (three month) of your cash is available to you each month.

In other words, if you want 1/3 of your cash available each month, buy a three-month T-Bill with 1/3 of your cash in three consecutive months.  Repeat.

[Ad Orientem]

Does anybody have any knowledge of safe deposit box access during the depression?? If banks were facing mobs of deposit seekers and decide to close doors, what access do safety deposit box holders have?

I ask this because I'd think one would want to hold some of there physical gold & cash there.

I don't know how useful anything that happened during the Depression would be today.

In general, I think that people don't have many tangible assets that are worth much anymore since consumer products become obsolete so quickly and globalization has made things that used to be pretty expensive much cheaper.

There is also the matter of the money itself being basically worthless from an intrinsic value perspective (with the notable exception of nickels, which are worth about 6 cents based on their metal content).

Thus, if you looked at what the average person actually owns you would find that it's not very much.  Maybe a little jewelry, maybe a little equity in a car or a house, but that's often about it.  In other words, the number of people who actually own anything worth putting in a safe deposit box is pretty small.  As far as having access to the box in a panic, it seems like any bank closings would be temporary (since a panic associated with a bank closing only gets worse the longer the bank is closed).  When the bank reoponed you could go get the contents of the box (if that is what you wanted to do).

I was reminded of this issue of people not actually owning very much when I refinanced my home recently.  I listed my retirement accounts and non-retirement investment accounts.  The fellow who was reviewing my file asked me if the investment accounts were IRAs and I said no.  He acted like he very rarely saw brokerage accounts that were not tax deferred accounts.

In general I agree with MediumTex.  My only caveat is to remember the "bank holiday" that FDR imposed while he set up the FDIC to end the run on the banks.

[TripleB]

Also FDIC is based on Congressional legislation, paying our treasury debt is based on the Constitution.

Good point. The US Government would never conceive of violating the Constitution. Unless doing so meant protection against drug dealers, child pornographers, and/or terrorists.

[murphy_p_t]

It seems like it might be worth the extra bit of hassle to simply keep your cash with Treasury Direct.  Someone recommended in another thread just buying one year T-bills once a year.  It eliminates counter party risk, until you need the money, at which point you can have whatever amount you need deposited into your bank account. 

I realize this isn't always possible (some 401k's, TSP, etc), but where it is possible, seems like it makes sense.  Plus it's cheaper with the expense ratios of some of these funds being what they are.

This has been a great discussion, particularly Gumby's observation of how it relates to the debacle at MF Global.

We'll have to see what kind of details come out on that in the end, but I will be extremely interested if we learn that they "borrowed" someone's personal T-bills.  That'd really be stunning.  It would certainly imply that Treasury Money Market funds would also be in danger of the same sort of abuse.  If anyone finds out whether or not something like this happened, I'd definitely be interested in hearing more.

As for TreasuryDirect, I've been hesitant to build out an entire ladder there.  The reason is that I have some concerns about how "liquid" such "cash" would really be.  From what I understand, in order to sell any of these securities, you'd need to transfer them to a brokerage, which appears to involve (at the very least) filling out a "government form" of unknown complexity and then mailing it in.  Then, once said transfer is complete, you'd be able to sell these securities on the secondary market via your brokerage.  This doesn't sound like a very simple or enjoyable process to me.  Does anyone have experience with going through this?

I think that before I started rigging up my T-ladder in TreasuryDirect, I'd want to have sent at least one T-bill through this entire process as the "canary in the coalmine".  If I'm in need of cash in any kind of hurry, the last thing I want to find myself doing is filling out some government form and sending it through the mail.

I'm curious if anyone is holding their cash at Treasury Direct and what your experience is? My understanding is that HB recommended treasury only MMF at more than one broker...why didn't he recommend using Treasury direct?

In my mind, Treasury direct:
1 eliminates counter-party risk of MMF / broker
2 eliminates expense ratio
3 ready availability by electronic transfer to your bank??

Reason 1 is the real reason I'm thinking about this in light of MF Global. What are the negatives to using Treasury Direct?

[WildAboutHarry]

What are the negatives to using Treasury Direct?

1) It is a cludgey government web site that has gotten somewhat better over time (they eliminated the secret decoder card recently, for example).

2) There is no cash holding account (i.e. no "money market fund"), just a zero interest parking place (a Zero Percent Certificate of Indebtedness, I think).  So you have to keep track of maturing bills, notes, and bonds and reinvest promptly.

3) There is a nasty disclaimer:

You are solely responsible for the confidentiality and use of your account number, password, and any other form(s) of authentication we may require. We will treat any transactions conducted using your password as having been authorized by you. We are not liable for any loss, liability, cost, or expense that you may incur as a result of transactions made using your password.

No SIPC, etc.  This is potentially a big deal in my opinion.

4) You cannot sell through Treasury Direct.  They used to offer this service, but now you need to transfer the securities to a brokerage if you want to sell.

I use TD to hold Savings Bonds (I now wish I had kept the paper ones), and I have bought bills and notes in the past.  In general it works as advertised.

[murphy_p_t]

4) You cannot sell through Treasury Direct.  They used to offer this service, but now you need to transfer the securities to a brokerage if you want to sell.

have you done this? is it all online? how long does it take?

thanks, WildAboutHarry.