A bank account free from political posturing?

July 25, 2011

By Matthew Goldstein

A measure aimed at protecting companies from community bank failures may be finding new life as a way to guard against the fallout from the political squabbling in Washington, D.C. over raising the debt ceiling.

Even though much of Wall Street believes that sanity will prevail in the end and the nation’s politicians will not allow a U.S. debt default to occur next week, the level of anxiety in the financial world has risen in the past few days. And that unease has led some money managers to begin looking at a post-financial crisis measure aimed at protecting non-interest bearing bank accounts as a potential safe haven.

One trader says he is aware of at least one manager who has moved some cash into a non-interest bearing checking account that that FDIC is providing unlimited insurance on in the event of a bank failure. The unlimited guarantee by the Federal Deposit Insurance Corp. runs through Dec. 2012 and was authorized under last year’s Dodd-Frank financial reform law.

The checking accounts that carry unlimited insurance are mainly ones offered to businesses, but some consumer accounts apply as well. The unlimited insurance means a business is protected against losses well in excess of the standard $250,000 deposit insurance granted by the FDIC in the event of a bank failure.

Some are suggesting that the these unlimited accounts could prove useful to money managers and even corporations that are keeping lots of cash in low-interest bearing money market funds. The fear is that if the U.S. government doesn’t raise the debt ceiling and does default on its obligations, money market funds could become unstable and “break the buck.”

When a money market fund breaks the buck its net asset value falls below a dollar and income cannot cover operating expenses. This happened with a few money market funds after Lehman Brothers collapsed in fall 2008.

Others are worried that some money market funds could even “break the buck,” simply if one of the credit rating agencies downgrades US debt from its current Triple A rating to double A. At least one major agency, Standard & Poor’s, has said a credit downgrade is possible even if the the politicians in D.C. agree to raise the nation’s debt ceiling before the Aug. 2 deadline.

It’s hard to imagine the Congress had all of this in mind when the unlimited insurance provision was included in the Dodd-Frank legislation. Then again, it is Congress which is taking center stage in the current political food fight over raising the debt ceiling.


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