What a couple of weeks this has been. I'm not exactly an old timer but I have been working in the financial community since 1979 and am a serious market historian, and in my life time I have seen nothing that matches the stunning collapses or forced sale and merger of major financial institutions we are watching almost daily.
The names are the who's who of the financial world and several of them will live on in infamy as symbols of the excess of the real estate and lending craze of the late 1990s and early part of this century. Countrywide, Merrill Lynch, AIG, Fannie Mae, Freddie Mac, Lehman Brothers and now Washington Mutual. In the span of two weeks we have seen the largest investment bank, largest insurance company, largest savings and loan, largest brokerage house and largest mortgage underwriters fail or be absorbed under duress. Who could have ever imagined it would be this bad?
The question now then is where should the typical attorney and claimant put their money at settlement to avoid credit risk or possible default of the lending institution? A few ideas and simple steps for all of our readers and listeners, while keeping in mind that I am NOT providing investment advice here but simply outlining how to arrange accounts to obtain protection:
1. If you have the funds in an FDIC bank you have $100,000 of protection so don't panic and pull funds from a bank if you hear rumors and your money is under the $100,000 limit. Part of the issue with Washington Mutual is that rumors of it's problems caused $18 billion in deposits to be pulled out of the bank since September 15th, essentially sealing the fate of the huge S&L. No financial entity can with stand that sort of run on it's deposits. I will bet that a solid majority of those funds were under the $100,000 limit, so they were moved needlessly and helped cause the very result they were fearing.
2. If you have more then $100,000 and are in a community bank or small regional bank, you can request a CDARS program which basically is a weekly process by which your bank buys CD's from other FDIC banks across the country, all under the $100,000 limit. Essentially you buy a program that costs about .20 basis points to .40 basis points in yield, allows you to purchase CD's and spread your risk so your funds are all under the FDIC umbrella. Your banker can assist you in designing a CDARS risk spreading strategy.
3. If you are with a commercial bank or Trust Company that doesn't participate in the CDARS program you need to speak with your banker or Trust officer about setting up a managed account that allows the bank or trust company to buy brokered CD's from banks with FDIC protection on your behalf. Basically this is the same as the CDARS program but your bank is buying the CD's in the market for you directly and holding them in your managed account. If the commercial bank goes down, your managed account assets are held separately and not commingled with the banks deposits and assets and are afforded protection.
4. If you are allocating funds to a structured settlement annuity, work with a structured settlement professional who has access to ALL of the annuity markets so that you can have the funds spread across several quality life companies. In most states, the state guarantee funds provide protection from $100,000 to $250,000 per annuity, so with a carefully planned structured settlement purchase your risk is spread across a variety of life markets. With the down grade of AIG to an A rating, along with Symetra and Liberty Life also having A ratings, there are essentially 7 markets left that have A+ ratings from AM Best and only one market, John Hancock, that enjoys a AAA rating from S&P. Work with your professional to select the right markets and spread the risk to insure that you have the best possible diversification.
5. Do NOT be purchasing bonds and long duration US Treasury bonds at this point and time. The rush to quality has driven down bond yields so a lot of people are tempted to buy long term bonds or junk rated bonds in order to get that extra interest rate kick. However, when the flight to quality eventually ends and the inevitable bump in interest rates occurs due to the drop in the value of the dollar over the cost of the huge market buy out, you will be seeing substantial losses in the value of your bond holdings. I know people are desperate for yield right now but you have to be exceptionally careful about the quality of bonds you buy, the duration and your over all plan or you could end up with substantial losses in value if rates jump back up over the next year or so. If you feel you must purchase bonds for a particular reason make sure you are working with an experienced investment adviser or financial planner who can assist you in this process and explain potential risks.
In summary, stay in cash, stay under FDIC limits, work with your banker and settlement expert to create a program that gives you protection in the short term and peace of mind in the long term. Structured settlements still make a great deal of sense in this market, but you have to make them part of a larger plan.