Fannie Mae and Freddie Mac

Safety of Deposits, Custodied Assets, and Money Market Funds

Update on Fannie Mae and Freddie Mac

Safety of Assets

With the failure of IndyMac Bank in California and the solvency of other financial institutions in question, we thought it would be timely to review the protections built into the system for our clients.

Bank accounts and deposits are insured the Federal Deposit Insurance Corporation (FDIC), a corporation of the federal government. The insurance, a government guarantee, covers up to $100,000 per depositor. For example, a husband and wife would have $200,000 total coverage per bank. This could be across joint and separate accounts. The accounts covered include demand deposits (checking accounts), negotiable order of withdrawal (NOW) accounts, savings accounts, certificates of deposit (CDs), cashier’s checks, and money market accounts (but not money market funds). If there is any question if one of your accounts is covered by the FDIC, check with your bank.

While the government honored deposits of all sizes during the savings and loan crisis of the 1980s and 1990s, there was and is no expressed guarantee that this will be repeated in the future. We have always viewed bank deposits above $100,000 as corporate bonds, subject to default by the issuer. If you have any doubts of the financial stability of your bank for assets not entrusted to Ferguson Wellman, we encourage you to diversify among other banks to keep the amount on deposit with any one bank under $100,000 threshold.

Regarding your assets managed by Ferguson Wellman, you should not be concerned about stocks, bonds, and cash custodied at a bank or broker/dealer. These are not considered deposits but rather are considered securities legally owned by the holder of the account. They are the account owner’s property and not subject to loss solely due to the failure of the institution. The only potential for a loss of securities would be due to fraud which is covered by insurance through the SIPC (Securities Investor Protection Corporation), another corporation of the federal government. The SIPC covers up to $500,000 in securities and cash. Many custodians carry additional insurance.

The FDIC does not cover money market funds. Money market funds are mutual funds that invest in short-term bonds. Short-term bonds have little price fluctuation, allowing these funds to keep the net-asset-value (price) of the funds at $1.00 and make regular interest payments. Some of these funds still hold asset-backed commercial paper that is backed by subprime mortgages. We are monitoring the money market funds in our clients’ accounts and are avoiding funds with exposure to these instruments.

Update on Fannie Mae and Freddie Mac

Over last weekend, the U.S. Treasury Department and the Federal Reserve Bank announced that funds will be provided to Fannie Mae and Freddie Mac to ensure their solvency. While their stock prices may continue to fall, this is essentially a federal guarantee of their debt, and we continue to be comfortable holding Fannie Mae and Freddie Mac bonds in our clients’ portfolios.

Marc Fovinci, CFA, leads our fixed income team at Ferguson Wellman Capital Management. He is a principal and shareholder. Prior to joining us in 1991, Fovinci led the fixed income department for the Washington State Investment Board, overseeing the bond portfolio of the Washington PERS plan.