Jim Lord: "Electronic Run on the Banks"--very naivegreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
Jim Lord's new article entitled, "Electronic Run on the Banks" (www.jimlord.to) is naive to say the least. His hypothetical scenario of a businessman taking $10 million out of a bank and placing it in a brokerage house Cash Management Account changes very little within the banking system. Exactly what is a Cash Management Account? It is a money market mutual fund with checkwriting features. In his $10 million scenario, where would that money go if the hypothetical businessman removed funds from his bank and deposited it into the Cash Management Account? A significant percentage of the deposit would simply be reinvested in deposits of large banks like Chase or Bank of America. Some would be invested in commercial paper (short term unsecured obligations of corporations) which would find its way back into the banking system. Also, a significant portion might be invested in short term government securities.
What this really means is that the funds will predominately be shifted from one bank to another WITHIN THE BANKING SYSTEM. While it is conceivable that liquitity problems could be created for a smaller bank if large amounts are removed, the Federal Reserve System would be obliged to reliquify such a "problem" bank. That portion invested in government securites would, in fact, leave the banking system. But again, the Federal Reserve would simply be sitting on increased funds, available to "problem" banks. Also, if my memory serves me, there are presidential executive orders in place that would allow the government to convert short term treasury bills (up to one year maturity) to long term treasury bonds (up to 30 year maturity). This form of "confiscation" would reduce stress on the banking system and the federal government by significantly reducing the redemption privileges of treasury bill (now treasury bond) holders.
So my question to Jim Lord is, "Where's the neutron bomb?"
-- Don Chen (DChen@newbie.com), October 22, 1999
The neutron bomb is what happens to your 10 million if you don't do as Jim suggests. In the bank it is only insured up to $100,000, but if it is in government securities it is insured for the full 10 million.
Having it in a cash management account is also a way of having your money exclusively isolated from the system. If you keep it within the banking system you are exposing it to a much higher risk factor because of any variety of chain reaction failures or Herstatt scenarios that could occur, in which case you might be likely to get $100,000 of your money after the dust settles.
It is kind of like taking a limousine through manhattan as opposed to riding the subway. The subway leaves you exposed to much more risk.
-- @ (@@@.@), October 23, 1999.
"The neutron bomb is what happens to your 10 million if you don't do as Jim suggests."------------- I respectfully disagree with you, "a". Mr. Lord is talking about SYSTEMIC banking system problems (i.e. bank runs). Sure the depositor COULD lose an amount exceeding the deposit insurance threshold of $100,000. But that's not the point. In fact, it would be unwise for a businessman with $10 million to hold a deposit of that amount in ANY one bank......even under the best of circumstances. A Cash Management Account (money market fund) or investment in U.S. treasury bills would be much safer due to diversification (funds spread throughout the banking system) and/or government guarantee.
"Having it in a cash management account is also a way of having your money exclusively isolated from the system."--- Again, I disagree with your proposition. As stated in my original post, most of the funds would merely be reinvested back into the banking system.
In addition, if there is truly a systemic banking crisis, FDIC insurance would manifest itself as the fraud it really is. It is only an effective tool if a small number of banks become insolvent (just like an insurance company covering damage from fire, etc.). FDIC insurance was "sold" to the public during the Great Depression of the 1930's. People have been mislead to believe it could protect depositors if thousands of banks failed, as they did during that era. I believe, for every $100 of bank deposits the FDIC reserves amount to less than two bucks.
-- Don Chen (DChen@newbie.com), October 23, 1999.
In a previous thread on this, I brought up the question (essentially): So you got the $10 million in a brokerage account where they put your cash balance into a MMF with check writing privileges.
(With some brokerages, you can specify commercial or government paper.)
Assuming you instruct your $10 million to be put in government paper, those t-bills or whatever ARE NOT IN YOUR NAME, they are in the broker's name, and the amount is a credit on your account at the brokerage, just like any stocks you "own" at the brokerage (assuming you haven't taken delivery of the stock certificates).
Used to be, maybe still is, called "street name" account.
Now, say the broker goes belly up. Who makes good on the $10,000,000? You will be just one of many creditors lined up.
Now there is a thing called SIPC (Securities Investors Protection Corporation) that MAY protect you. But who knows? And I don't know if all brokers belong to that or not.
To find out about SIPC, go to
and simply enter "SIPC" into their search window.
-- A (A@AisA.com), October 23, 1999.
I noticed you are a newbie so you should know that their is another poster going by the name of "a", so please refer to me as @, thanks. Welcome to the forum.
Well, I'm not real clear on the insurance thing either, but I'm just guessing that if they were able to pay off any percentage to people whose deposits were somehow electronically lost, that they would have to somehow divy it up in a way that was proportionally fair. But I think the guy whose got his in government securitities would get paid before any of the banks would.
Sounds like Jim was trying to caution anyone with large amounts of money to get most of it out of banks, and I agree. As to what would would be preferable, I'm not sure, but I wouldn't leave it in banks, that's for sure. I wish I had such problems to worry about!
-- @ (@@@.@), October 23, 1999.
Greetings "A" (A is A, as in Ayn Rand?):
The Securities Investor Protection Corporation (SIPC) was established to protect investors holding assets with brokerage firms. It is to Merrill Lynch what the FDIC is to Bank of America.
You are correct in asserting that securities held by a broker are held in "street name." If I recall, in the event a brokerage firm becomes insolvent, the "customer" holds the first claim upon its assets (subject, of course, to dollar limitations).
With regard to a hypothetical $10 million account, the securities don't just vanish if the firm becomes insolvent (unless fraud is involved). The Cash Management Account's money market fund (in most cases) is a separate legal entity. Thus, the customer owns a portion of that entity just as one might own shares of General Motors. As a result, the first priority claim by a "customer" would be quite secure. On the other hand, if the problem is systemic (e.g. massive brokerage firm failures), the "customer" would face the same dilemma a bank depositor faces in the event of a systemic banking crisis.
-- Don Chen (DChen@newbie.com), October 23, 1999.
If I worked for a bank, brokerage, or was a fund manager... If the system crashes, I would make every effort to steal as much of your money as I can get my hands on to protect myself and my family, before the gov puts a lockdown on withdrawls. All bets will be off if the grid goes down
-- Disgusted (firstname.lastname@example.org), October 23, 1999.
the reason "Electronic Run on the Banks" is 'very naive' is because Jim Lord is "very naive". He thinks that people will buy his scare tactics the same way they bought Gary Norths. JL is a bit too late though...so he has to be less subtle that GN if he expects to make any money. THAT will be his downfall...working to quickly and "outing" his own extremist agenda.
-- FUDmasters (email@example.com), October 23, 1999.
Don don't look for much intelligence in this forum and thoughful conversation since your post goes wizzing over their heads. Unless you suggest putting every single bit of money into gold, then you are going to be talking to a brick wall.
-- Idiocyat (firstname.lastname@example.org), October 23, 1999.
With thoughts like yours, I'd be changing my handle. You are not proper enough to use one as you have.
-- (email@example.com_next), October 23, 1999.
My understanding (though limited on this subject) is that a primary difference between a bank checking/savings deposit and a money market fund is that the bank uses your deposits as loans to generate profit for the bank in the form of interest from the loan which is returned in part as interest to the depositor. The money market fund is essentially a liquid mutual fund that owns primarily govt bonds of various maturities. As such, the money market fund is not exposed to fractional reserve banking practices - so Jim Lord postulates correctly that ones funds are more liquid in a money market fund than a deposit account.
-- Bill P (firstname.lastname@example.org), October 23, 1999.
I think the answer to your question is, "Yes and no." A money market fund is nothing more than a corporation or trust that invests in SHORT TERM interest bearing obligations of the following: 1) term deposits of banks like Wells Fargo, Bank of America, or First Interstate; 2) commercial paper issued by large corporations like Xerox, General Motors, or IBM; 3) treasury bills issued and guaranteed by the U.S. government; 4) promissory notes issued by agencies of the U.S. government and 5) to a lesser degree esoteric financial instruments such as repurchase agreements.
Some money market funds ONLY invest in U.S. government securities but they generally pay a lower dividend than those investing in a variety of financial paper. That is because the "government only" funds are perceived to have a lower risk (don't forget that the government can "print" its way out of a financial debacle; a bank or corporation can't).
It is therefore incorrect to say that most money market funds are NOT exposed to the fractional reserve system. They are direct participants by depositing funds with the various banks and indirect participants by lendiing to corporations in the form of commercial paper. However, a government ONLY money market fund is NOT directly exposed to the fractional reserve banking system since the funds are loaned directly to the U.S. government. But one might conclude that "government only" funds are connected to the fractional reserve system, since the money flows through the Federal Reserve System, which is the sponsor of fractional reserve banking in the U.S.
The funds invested in a money market fund are more liquid only because of the diversification of the portfolio AND "investment" with the U.S. government......NOT because of any connection with fractional reserve banking.
-- Don Chen (DChen@musician.org), October 23, 1999.
Don, yes, "A is A" as in "reality is/exists".
BTW, I posted above how to get info on SIPC, but I haven't looked it up myself, as I have only a few thousand max at any time in those types of accounts (and they are in the government MMF options offered by the brokers, not the commercial/banking paper MMF).
-- A (A@AisA.com), October 24, 1999.
Don Chen, do you have a reference source you can post regarding the following statement:
"I believe, for every $100 of bank deposits the FDIC reserves amount to less than two bucks."
-- OR (email@example.com), October 24, 1999.
At the time I posted the note, that reference was a 15 year old recollection. But since I presumed the situation to be worse now, I had no hesitation about posting the 2% figure. Please note the following from:
"The reserve ratio for the BIF stood at 1.38 percent (unaudited) as of December 31, 1998..........."
Since BIF consists of insured deposits ONLY, I can now guess that the statement should read, "For every $100 of total deposits, the FDIC reserve amounts to approximately ONE BUCK." =====> lol
-- Don Chen (DChen@musician.org), October 24, 1999.