As we continue to navigate through these unprecedented times, it is important to stay informed about the potential risks associated with our financial institutions and investments. Today, we would like to draw your attention to two important articles that we believe are crucial in understanding the current state of the financial industry.
The first article is “Too Big Not To Fail” by Danielle DiMartino Booth. In this thought-provoking piece, Danielle explores the vulnerability of small and regional banks to bank runs and the potential ripple effect this could have on the larger financial system. As a firm that values risk management and preservation of capital, we believe that understanding the risks associated with smaller banks is essential to protecting our clients’ portfolios
The second article is our own Public Service Announcement posted on Social Media last Friday, which highlights the risks associated with moving FDIC-insured and uninsured deposits to Money Market Funds. We wanted to bring your attention to the fact that not all Money Market Mutual Funds are created equal, and are not FDIC insured. The PSA explains the different types of Money Market Funds and the underlying securities associated with them, as well as the counterparty risks involved. We encourage you to review the PSA and the underlying securities and counter-parties associated with any Money Market Funds before making any investment decisions.
At Northern Pacific Asset Management, we take pride in being proactive in our approach to risk management and strive to educate our clients on potential risks associated with their investments. We hope that these articles serve as a valuable resource and that you take some time to read and digest them.
As always, please do not hesitate to reach out to us with any questions or concerns you may have.
Best regards,
Joshua Graeff
President
We would like to share an insightful article with you from Danielle DiMartino Booth’s Substack blog titled “Too Small Not To Fail: A Short History of the World.” In this article, Danielle provides a thought-provoking analysis of the concept of “too big to fail” and how it has evolved over time, into what has become”Too Small Not To Fail”. As we navigate through uncertain economic times, it is important to understand the historical context and potential risks associated with small and regional financial institutions in the current environment. Danielle’s article offers valuable insights on this topic and we believe it is a must-read for anyone concerned with the current state of the financial system. We encourage you to take a few moments to read through the article and welcome any questions or feedback you may have.
FT – Cash pours into US money market funds as investors flee bank turmoil
Last Friday, we posted a Public Service Announcement on social media in response to the above article from The Financial Times. We want to take this opportunity to reiterate the message and provide further details to help you understand the risks associated with Money Market Funds.
Not all Money Market Mutual Funds are created equal and are not FDIC insured. The highest-risk Money Market Funds are invested in commercial paper and are often named “PRIME” Money Market Funds. These funds are tied to financial and non-financial institutions, not the US Government, so there is no implicit or explicit US Government guarantee associated with these instruments.
“Tax-Free” or “Municipal” Money Market Funds are backed by local and state government securities and also come with default risks associated with the underlying securities issued by local and state governments.
Money Market Mutual Funds containing US Government, Treasury, and US Government Sponsored Agency securities will have the name “Government or Treasury.” These securities are not FDIC insured, but they hold the implicit guarantee of the US Government similar to US Treasury Bonds.
However, many of these Government, GSE, or Treasury Money Market Funds contain Repurchase Agreements which are not the same as US Treasuries, Government agency, or GSE instruments, even though technically, they come with the same implicit US government backing by the Federal Reserve and the tax paying authority of US Department of Treasury.
Before moving your FDIC-insured savings, checking, and cash account balances to Money Market Accounts at your bank or Money Market Mutual Funds through your investment broker, we urge you to review the underlying securities and counter-parties associated with the account or funds along with the risk associated with them by fully reading the prospectus.
At Northern Pacific Asset Management, we use individual US Treasury Bills and/or “Treasury Only” money market mutual funds for our clients, which are ONLY invested in US Treasury Bills. US Treasury Bills are considered “risk-free” as they are backed by the full faith and credit of the US Government, are traded in the most liquid market available, and are utilized as the most pristine collateral asset available in the settlement of global transactions, giving us the most confidence in our client’s ability to access their funds even in the most volatile markets.
In addition, we offer FDIC Insured cash sweep accounts with FDIC insurance up to $2.5 or $5 million by spreading your deposit across multiple participant banks. While the interest rate offered by these high FDIC-insured sweep accounts is often lower than Money Market Funds or CDs, you’ll have expanded FDIC insurance on your large deposit accounts and be able to spread your risk across multiple banks without having to open multiple accounts through a number of banks.
We believe it’s important to understand the risks of Money Market Funds and Repurchase Agreements, especially the potential for market repricing of collateral used and limited access to funds in times of stress. Please click on the button below for more information about Repurchase Agreements and Money Market Funds from Schwab Asset Management.
As always, we’re here to help answer any questions you may have. Please don’t hesitate to reach out to us.
Repurchase Agreements and Money Market Funds – Schwab Asset Management
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