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MONDAY, SEPTEMBER 22, 2008
CURRENT YIELD
Credit Where Credit Is Due
By RANDALL W. FORSYTH
When credit collapses, nothing else can stand.
CREDIT COUNTS. IF YOU don't believe it now, you never will.
While multi-hundred-point gyrations in the Dow grabbed the media headlines, credit borrowing and lending -- the basic functions of finance, on which the real economy of producing, buying and selling depend to function from day to day -- came close to breaking down.
Nothing compares with what's happened in the past fortnight.
The government bailout of Fannie Mae and Freddie Mac, as announced Sunday, Sept. 7, was no surprise. It had been foretold on another balmy Sunday evening in mid-July, and became inevitable as the government-sponsored enterprises' ability to finance themselves was called into question.
But the Treasury bailout of Fannie and Freddie failed to stop the downward spiral. The following Sunday, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke declined to help fund a takeover of Lehman Brothers, as the central bank had done with JPMorgan Chase's acquisition of Bear Stearns in March. Lehman was left with no choice but to file for bankruptcy the following day.
Faced with the possibility it could meet a similar fate, Merrill Lynch rushed to merge with Bank of America. The Thundering Herd had always been fiercely independent, unlike Lehman or Morgan Stanley. (Remember their respective divorces from American Express and Dean Witter?) But getting $29 a share was a lot better than the $10 Bear got, and the zip Lehman received. Yet the prospect of failure by American International Group posed a bigger risk. AIG has a monstrous $1 trillion balance sheet and its "tentacles" were everywhere, as New York Gov. David Paterson characterized the reach of the nation's largest insurer.
Tuesday afternoon, the Federal Open Market Committee opted to hold its key target rate for federal funds unchanged, at 2%, confounding expectations of a cut by Fed watchers and the futures market. The reasoning would become apparent that evening. The central bank decided to provide a massive $85 billion loan to AIG at stringent terms, and an equity stake of 79.9%, the same as Treasury got for bailing out Fannie and Freddie.
But even that didn't calm the markets. Strains worsened after a major money market fund "broke the buck" -- that is, saw its share price fall below the sacrosanct $1.00-a-share level -- and suspended redemptions.
This was the result of unintended (but foreseeable) consequences. The money fund held Lehman paper, which it wrote down to zero, knocking its NAV to 97 cents. Holders, who had assumed they would always get a dollar out for every dollar they put in, bolted for the exits. This was especially the case of institutional money funds, which yanked $173 billion out in the week ended Wednesday, most of it that day. Instead, these investors fled for the safety of T-bills, sending their yields to virtually nil.
The tide ultimately was turned Thursday afternoon, after news reports indicated Washington was cooking up a massive scheme: A plan recalling the Resolution Trust Corp., which worked out the savings-and-loan failures of the late 1980s and 1990s, was in the works.
By Friday morning, it was official. Treasury Secretary Paulson announced that the plan would involve "hundreds of billions" of taxpayers' dollars to buy up bad assets.
In addition, the Treasury would provide insurance for money funds analogous to FDIC backing for bank deposits. That was aimed at stopping the modern-day bank run on the money funds and thus alleviating the strains on the money market. The Fed, for its part, also instituted an array of new lending facilities to stop the crunch. And, the SEC called a halt to short sales of financial stocks. That came in reaction to the wholesale selling of icons such as Goldman Sachs and Morgan Stanley. But their credit default swaps-derivatives insuring the credits of the investment banks-cratered to levels that implied imminent bankruptcy. Sellers of credit protection hedged their position by shorting the stock. The resulting plunge in the stock further tightened the credit vise.
The government's actions does help address the liquidity crisis, for now. Stocks soared Thursday and Friday, and the strains in money markets eased. But the crux of the crisis remains. Lenders can't lend while they're laden with underwater, illiquid assets and can't raise capital.
The government may have put out the fire. The rebuilding lies ahead.
What You Will Find Here
- OJOS11
- Articles and news of general interest about investing, saving, personal finance, retirement, insurance, saving on taxes, college funding, financial literacy, estate planning, consumer education, long term care, financial services, help for seniors and business owners.
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CREDIT LAND MINES - FROM consumerinfo.com (Experian)
Possible land mines
Your sense of financial well being can be obliterated easily by any number of land mines that lie in wait for the unsavvy user of credit. Here are a few of them.
The cost of cash advances
Getting cash from your credit card is one of the most expensive ways to put money in your pocket. There is usually no grace period on cash advances. That means you're charged interest the second the ATM spits out the cash. And lenders often charge a higher interest rate for this "convenience." So on top of the fee you'll pay to get a cash advance - typically around 2% of the total - you'll pay a higher interest from the day you get it. With all of this in mind, you might want to reserve cash advances for true emergencies.
Short or non-existent grace periods
If you'll be paying your bill in full every month, you'll want a reasonable "grace period" in which to pay the bill before interest charges start accruing. Look at the disclosure information to see when interest is charged on new purchases, and make sure you pay your bill on time. If your payment is one day late it will almost certainly trigger interest charges. Also, if you carry a balance over months, chances are you'll have no grace period for new purchases.
When dealing with debt consolidation and finance companies, consider that you may end up with one monthly bill, but you might end up paying quite a bit of money for a long time for that convenience. If you use a home equity loan to consolidate, you are using your home as collateral.
Low minimum monthly payments
The minimum may only be 2% to 3% of the balance, a number that sounds low enough to some people. However, the price of any given item will be relatively steep over time and it may take years before you finally pay the bill in full.
Low APRs
If you'll be running a balance, the interest rate or APR annual percentage rate) will be an important consideration. Find a card with a low APR, but do keep in mind that the lowest APRs (around 2.9%) are "teaser rates." Teaser rates go up sharply as soon as the introductory period expires. Read the fine print to see when the rate will go up and the maximum rate that can be charged. If you're not prepared to pay your balance in full by the end of the teaser period, don't fall for the pitch. Instead, find a regular card with the lowest rate for which you qualify. Be sure to check with as many creditors as possible and shop around for the best rates.
Are you considering an advance-fee loans? These are almost always a bad deal. You pay a fee of hundreds of dollars for a company to guarantee you'll receive a credit card or personal loan. Legitimate creditors will not guarantee a loan and will not ask for payment until the consumer has received the loan.
Unauthorized use of a credit card
A dishonest person can use a consumer's name, card number and expiration date to order items over the phone, the Internet or through a catalogue. If a credit card has been lost or stolen, notify the card issuer immediately. Pre-approved card offers can be stolen from a mailbox without the knowledge of the intended recipient and redirected elsewhere. If not shredded, information containing credit card numbers and names can be taken from trash containers. In addition to fraudulent charges, identity theft - a much more severe problem - can result.
Credit report misinformation
Check your report at least once a year to make sure information is being reported correctly. While inaccuracies that affect your creditworthiness are rare, it can happen. Credit bureaus like Experian® can help you make sure everything is correct.
Mistakes on a credit card bill
Study your monthly bill carefully and compare the charges against sales receipts. If you have any doubts about a charge, call the credit card company and ask them to provide more information. Make sure the APR listed on the statement is correct, especially if you have a low APR as a promotional offer. Check to see if returned purchases were correctly credited to your account.
Impulse buying
With the power of plastic, it's certainly tempting to indulge in purchases you don't necessarily need. Such purchases can add up fast and generate a balance that takes you by surprise. When you're contemplating an impulse purchase on credit, take a second to think about the check you'll be writing to cover the cost a month down the road.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Your sense of financial well being can be obliterated easily by any number of land mines that lie in wait for the unsavvy user of credit. Here are a few of them.
The cost of cash advances
Getting cash from your credit card is one of the most expensive ways to put money in your pocket. There is usually no grace period on cash advances. That means you're charged interest the second the ATM spits out the cash. And lenders often charge a higher interest rate for this "convenience." So on top of the fee you'll pay to get a cash advance - typically around 2% of the total - you'll pay a higher interest from the day you get it. With all of this in mind, you might want to reserve cash advances for true emergencies.
Short or non-existent grace periods
If you'll be paying your bill in full every month, you'll want a reasonable "grace period" in which to pay the bill before interest charges start accruing. Look at the disclosure information to see when interest is charged on new purchases, and make sure you pay your bill on time. If your payment is one day late it will almost certainly trigger interest charges. Also, if you carry a balance over months, chances are you'll have no grace period for new purchases.
When dealing with debt consolidation and finance companies, consider that you may end up with one monthly bill, but you might end up paying quite a bit of money for a long time for that convenience. If you use a home equity loan to consolidate, you are using your home as collateral.
Low minimum monthly payments
The minimum may only be 2% to 3% of the balance, a number that sounds low enough to some people. However, the price of any given item will be relatively steep over time and it may take years before you finally pay the bill in full.
Low APRs
If you'll be running a balance, the interest rate or APR annual percentage rate) will be an important consideration. Find a card with a low APR, but do keep in mind that the lowest APRs (around 2.9%) are "teaser rates." Teaser rates go up sharply as soon as the introductory period expires. Read the fine print to see when the rate will go up and the maximum rate that can be charged. If you're not prepared to pay your balance in full by the end of the teaser period, don't fall for the pitch. Instead, find a regular card with the lowest rate for which you qualify. Be sure to check with as many creditors as possible and shop around for the best rates.
Are you considering an advance-fee loans? These are almost always a bad deal. You pay a fee of hundreds of dollars for a company to guarantee you'll receive a credit card or personal loan. Legitimate creditors will not guarantee a loan and will not ask for payment until the consumer has received the loan.
Unauthorized use of a credit card
A dishonest person can use a consumer's name, card number and expiration date to order items over the phone, the Internet or through a catalogue. If a credit card has been lost or stolen, notify the card issuer immediately. Pre-approved card offers can be stolen from a mailbox without the knowledge of the intended recipient and redirected elsewhere. If not shredded, information containing credit card numbers and names can be taken from trash containers. In addition to fraudulent charges, identity theft - a much more severe problem - can result.
Credit report misinformation
Check your report at least once a year to make sure information is being reported correctly. While inaccuracies that affect your creditworthiness are rare, it can happen. Credit bureaus like Experian® can help you make sure everything is correct.
Mistakes on a credit card bill
Study your monthly bill carefully and compare the charges against sales receipts. If you have any doubts about a charge, call the credit card company and ask them to provide more information. Make sure the APR listed on the statement is correct, especially if you have a low APR as a promotional offer. Check to see if returned purchases were correctly credited to your account.
Impulse buying
With the power of plastic, it's certainly tempting to indulge in purchases you don't necessarily need. Such purchases can add up fast and generate a balance that takes you by surprise. When you're contemplating an impulse purchase on credit, take a second to think about the check you'll be writing to cover the cost a month down the road.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Safety First (from Barrons)
Monday, September 15, 2008
Retirement: Safety First
By KAREN HUBE
Risk experts explain how to keep your nest egg from cracking in shaky markets. Also, which investments offer the most stable returns during slumps? And, exotic real estate -- with an American twist.
THESE ARE SCARY TIMES FOR INVESTORS TRYING to protect and increase their retirement portfolios. With stock prices gyrating and major financial institutions crumbling, the mattress may look like as good a place as any to stash your holdings.
Not so fast. Take it from five titans of risk management: There are steps you can take to protect your nest egg for as longs the tumult lasts -- steps that will make sharp market dips much easier to endure.
Even better, without sacrificing those safeguards, you can position your retirement funds to participate in the earliest gains as the stock market begins to recover. And yes, these experts say, the market will recover.
So heed the practical advice and recommendations of the intellects whose views you'll read on the following pages -- Barton Briggs, Peter Bernstein, Charles Ellis, David Darst and Jeremy Siegel -- and reserve that mattress for some peaceful sleep.
Brad Trent
Peter Bernstein
Founder, Peter L. Bernstein Inc.
After almost six decades of contemplating market risk, Peter Bernstein knows how to spot investors' worst-case scenarios before they do. These days, what he sees concerns him deeply.
As the current economic crisis unfolds in ways that even the most bearish Wall Street strategists never predicted, Bernstein says any number of disasters could still be in store for investors. For those saving for retirement, in particular, taking protective measures is critical.
"The goal for investors right now should be survival, not making a killing," says Bernstein, who has been an economics professor and money manager, and is the author of several books, including Against the Gods, a classic on risk. "You should be thinking about how to hedge against extreme outcomes."
With markets down and unemployment and home foreclosures rising, what more could happen?
"A major bank failure, causing a run on banks in general," Bernstein speculates. Or "a run on the dollar, perhaps provoked by what foreigners view as too big a fiscal deficit."
Or runaway inflation or deflation, either of which could be disastrous for long-term retirement investors.
The next step of this crisis is hard to predict, Bernstein says, because the crisis is so unusual. "Nothing like this has ever happened before," he continues. "There have been credit crunches and housing crises and dollar crises, but having all the chickens coming home to roost at the same time and interacting with one another is unique. We have historical perspective on the parts, but not the whole, and that makes things both interesting and scary."
He suggests diversifying a portfolio so that it is not only exposed to many different markets, but also to ensure it can weather all kinds of scenarios.
For example, to guard against rampant inflation, every portfolio should contain at least a sprinkling of Treasury inflation-protected securities and short-term Treasuries, Bernstein suggests.
The TIPS come with a guaranteed return above inflation, and short-term Treasuries enable you to roll your money into higher-yielding issues every 90 days if inflation rises and interest rates follow.
"Short-term Treasuries aren't a very good holding under normal conditions, but they are a hedge against extreme conditions," Bernstein says. Long-term Treasuries are a good hedge against deflation, he adds.
Bernstein also recommends holding some gold as a hedge against a collapse in the value of the dollar if China or other nations decide they no longer want to invest as much in U.S. Treasuries. "In a total disaster, where there is a run from paper currency, you'll get your biggest bang for your buck in gold," he says.
You don't have to buy much gold to have an effective hedge, he adds, noting that "if everything hits the fan, gold could be worth several thousand dollars an ounce." It is now valued at about $750 an ounce.
Above all, don't let your defensive attitude waver, Bernstein counsels.
"Every day, we are faced by the possibility that something we never dreamed of will happen," he cautions.
"In 1958, I'd been in the business for seven years when, for the first time in history, bonds yielded more than stocks. My associates said, 'It's an anomaly, don't worry, it will be reversed.' It's 50 years later, and I'm still waiting."
Gary Spector
Charles Ellis
Founder, Greenwich Associates
In Japan, investors fill their stock portfolios primarily with Japanese companies. The French place their biggest bets on French companies. The story is the same in New Zealand, India, Russia, and around the globe: Investors favor their own countries' stocks.
For U.S. investors it's easy to criticize foreign investors for being provincial. But Charles Ellis, a former chair of Yale's Investment Committee and a consultant for institutional investors, has a suggestion for them: Look in the mirror.
The typical U.S. investor holds at least 85% of his stock portfolio in domestic stocks, even though the U.S. stock market accounts for only 40% to 45% of the world's total stock-market value.
"People feel more comfortable emphasizing their own country, because they recognize the company names," says Ellis, whose internationally renowned book is Winning the Loser's Game. "But from a pure investment point of view, it doesn't do any good" -- particularly for folks investing for retirement and other long-term goals, he says.
A U.S.-centric stock portfolio creates high levels of volatility, and denies investors the benefit of surging markets around the world, Ellis notes.
The best risk-adjusted returns over the long term can be scored by matching the market capitalization weightings of the world's markets, Ellis says. That would mean putting 45% in domestic stocks, 47% in developed foreign markets and 8% in developing foreign markets.
The idea is to have no bets on whether one market or another will be stronger in coming months.
"If you said, 'I don't really have a smart idea about the direction of the markets, I'm just a sensible person, what should I do?,' the answer is to go to a global index and start there," Ellis says. "If you have reason to make any changes from there...then you can adjust it from a neutral to an opinionated portfolio."
Traditionally, investors have been hesitant to plunge more deeply into foreign markets -- because of perceptions that foreign-currency exposure presents too much risk, foreign companies don't get enough oversight from their governments, and foreign markets are simply too volatile.
To Ellis, however, the truly global allocation of assets trumps all those concerns.
"There really is a free lunch, and it's called diversification," he says. "By diversifying, you reduce your risk substantially. It doesn't cost anything, and you get something for it."
Evan Kafka
Barton Biggs
Managing Partner, Traxis Partners
When the herd zigs, Barton Biggs zags. So it shouldn't be a surprise that while U.S. investors can't dump their technology stocks fast enough these days, Biggs has been declaring that now is the time to get into the trampled tech sector.
The best values right now, he says, are in large-cap, high-quality stocks around the world, "but particularly in the U.S., and within that category, technology appeals to me the most."
Biggs, co-founder and managing partner of the $1.3 billion hedge fund Traxis Partners in New York, is the former global investment strategist at Morgan Stanley.
"We've been in a period of stagnation in terms of tech spending since the bubble burst in 2000. The next recovery is going to be marked by unusual spending in all types of technology...and the sector will be one of the first areas to pick up as the U.S. and the world begin to recover," Biggs says.
A market recovery, he believes, will begin in the first half of 2009. By then, oil prices should be consistently below $120 a barrel, and the housing market should have started stabilizing.
Due to the government's takeover of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) -- which he characterizes as "one of the most important events of the last 20 years" -- further declines in home prices are likely to be more moderate than expected earlier.
But don't wait for an economic recovery in order to step into large domestic stocks and global tech stocks, or "the markets will already be up," Biggs says. "I wouldn't be surprised if later, in retrospect, we will find that the stock market is at its bottom about now."
Biggs is a notoriously trend-bucking strategist, which has sometimes paid off massively for those who follow him. In the late 1990s, he spared his clients huge losses by predicting the technology-driven bull market was going to plummet. And in 2003, when investors were steering clear of Japan, he moved into the Japanese stock market, adding untold wealth to clients' portfolios in the following three years as Japan soared.
Today, while many Wall Street strategists are recommending an underweighted position in stocks, Biggs is defiantly upbeat." The public has been selling stocks and has an incredible amount of liquidity, and so have institutions and hedge funds," he says.
"The fact that everyone is cautious has raised a lot of investable funds, and that's bullish," he adds. "We're in a stage where ordinary investors ought to be buying on weakness," says Biggs.
Some of his top picks: Cisco (CSCO), IBM (IBM) and Google (GOOG).
Biggs is steering clear, for now, of stocks in the materials, energy, agricultural and industrial- and oil-commodity sectors, but notes that "those will come on strong again -- but not until further into the recovery."
Dave Moser
Jeremy Siegel,
Professor, Wharton School
To most investors, dividend-paying stocks seem about as cutting edge as a corded telephone. Yet Jeremy Siegel talks about stock dividends with the enthusiasm and sense of discovery of a first-time iPhone user.
Through his recent research, Siegel, a finance professor at the University of Pennsylvania's Wharton School of Business, has become enamored of the dividend, and hopes to elevate its status from a humdrum staple for retirement-income seekers to a punch-packing contributor to younger investors' retirement portfolios.
He argues that the tendency of investors to look solely at the growth rates of earnings, sales and cash flow hurts them in the long run. The bias toward high-growth companies causes them to miss out on the high dividend-paying companies whose total returns, contrary to popular perception, have historically outshined the performance of growth stocks over time, he says.
"Everyone thinks it's old-fashioned to think about dividends, but investors have historically gotten about an extra two or three percentage points a year of higher returns by investing in the highest dividend-yielding stocks and reinvesting the dividends," says Siegel, author of The Future for Investors, Stocks for The Long Run, and other books.
One of his most striking examples is the difference in fortunes between people who invested in IBM rather than Standard Oil, now ExxonMobil (XOM), in 1950. Over the next five decades, through 2003, IBM trounced Standard Oil in per-share growth of revenue, dividends and earnings. But Standard Oil had a higher total return: A $1,000 investment in Standard Oil would have grown to $1.26 million with dividends reinvested, compared to $961,000 -- 24% less -- for IBM investors. "And that was before the recent energy price increases," Siegel says.
While financial companies historically have been reliable dividend payers, the dividends on Fannie Mae and Freddie Mac have been halted, and 21 financial-services firms have cut their payouts since the beginning of this year, according to Standard & Poor's. In a typical year, two or three financial firms cut their dividends, but the majority of them increase their payouts.
Long a supporter of index investing, Siegel now favors index funds that rebalance on a dividend-weighted basis. Siegel is a senior investment strategy adviser at WisdomTree, which has developed a series of funds that operate this way.
A dividend-weighted index rebalances regularly to favor stocks that pay the highest dividend. Most indexed portfolios, in contrast, rebalance based on the market capitalization of the stocks. With a dividend-weighted index, investors end up buying stocks when their prices are low relative to their fundamentals. A high dividend yield is a strong indication that a stock is undervalued, Siegel says.
Throughout history, dividend-paying stocks have gotten the spotlight. When the tech bubble burst in 2000, many investors sought out dividend-paying stocks to try to steady their portfolios. In 2003, payouts got a boost when the tax rate on dividends was changed to the 15% capital-gains rate, versus the higher income-tax rates.
Some of this tax benefit may get rolled back if Sen. Barack Obama (D.-Ill.) is elected president; he has said he would raise the dividend tax rate to 20% -- "but that's still a preferred rate," Siegel points out. He adds that investors who keep a steady spotlight on the high dividend-paying stocks in their portfolios are likely to have a brighter retirement.
Gary Spector
David Darst
Global Wealth Management Group,
Morgan Stanley
David Darst is the Iron Chef of the investment world. As chief investment strategist at Morgan Stanley's Global Wealth Management Group for the past 11 years and one of Wall Street's foremost experts on asset allocation, Darst spends much of his time considering the perfect ingredients -- of a portfolio, that is. He takes a little of this, blends it with a little of that, and -- voilà ! -- produces nourishing retirement portfolios.
Investors who have seen the air sucked out of their retirement portfolios lately might need convincing. The problem in the typical portfolio, Darst suspects, is that most people skimp on alternative investments like commodities, real estate and hedge funds.
"The perception is that they're too risky, but we view the benefits of alternatives more by the reduced volatility they bring to a portfolio than by an increased return," says Darst, who recommends that folks with $1 million to $20 million to allocate 20% to alternative investments, and those with less, 8%.
While any particular alternative investment may, indeed, be more volatile than the broad stock or bond markets, a portfolio diversified across stocks, fixed income, and a number of different alternatives will likely be less risky than one with fewer asset classes -- and it may even score higher returns, Darst says.
Consider a portfolio with 40% invested in stocks and the rest split between commodities and real estate. That may sound risky, but according to Ned Davis Research, in the 35 years through 2007, such a portfolio had the same risk as a portfolio with 40% invested in stocks and 60% in bonds. Yet it gained almost two percentage points more per year -- 12.47% versus 10.5%.
Within an alternative-investment portfolio, Darst recommends a 50% weighting in hedge funds, which gives investors the potential to benefit from talented money managers who have the freedom to invest where and how they see fit, without constraint.
Some 20% should be in real assets, such as commodities and gold. Both provide a hedge against inflation, and gold in particular has been a historic refuge in times of turmoil in the financial markets, political instability, or other crises.
Another 20% should be directed to managed-futures funds, Darst says. These invest by going long or short futures contracts in a broad basket of commodities and other investments, including metals, grains, sugar, foreign currencies, stocks and bonds.
Managed-futures funds provide a cushion to portfolios in down markets, because they typically are inversely related to the stock market, Darst says.
During the period 2000 to 2002, when the tech bubble burst and the Standard & Poor's 500 cratered 31%, the Barclay CTA Index of Managed Futures Funds was up 20%. In the fourth quarter of 1987, when the U.S. stock market crashed and the S&P 500 lost 22.5%, the Barclay index was up 13.8%. This year through August, the S&P 500 was down 14%, while the Barclay index was up 6.95%.
Lastly, Darst recommends placing 10% of a portfolio in Treasury inflation-protected securities to get their risk-dampening benefits, Darst says.
While he has usually included real estate in the alternative-investments portfolio through direct investments or REITs (real-estate investment trusts), he predicted enormous volatility in the sector last December and made a tactical move to eliminate real estate from his models.
For the average investor, however, it would take a rare event to prompt the removal of an asset class from the alternative-investments portfolio, because that could mean missing its next surge.
Says Darst: "You want to have all of your relatives at the table. Not just the 17-year-old singer in the family that everyone has always listened to, but the quiet nephew who turns out to win the Pulitzer Prize."
Follow advice like that, and investors themselves just might take home a prize.
E-mail comments to mail@barrons.com
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Retirement: Safety First
By KAREN HUBE
Risk experts explain how to keep your nest egg from cracking in shaky markets. Also, which investments offer the most stable returns during slumps? And, exotic real estate -- with an American twist.
THESE ARE SCARY TIMES FOR INVESTORS TRYING to protect and increase their retirement portfolios. With stock prices gyrating and major financial institutions crumbling, the mattress may look like as good a place as any to stash your holdings.
Not so fast. Take it from five titans of risk management: There are steps you can take to protect your nest egg for as longs the tumult lasts -- steps that will make sharp market dips much easier to endure.
Even better, without sacrificing those safeguards, you can position your retirement funds to participate in the earliest gains as the stock market begins to recover. And yes, these experts say, the market will recover.
So heed the practical advice and recommendations of the intellects whose views you'll read on the following pages -- Barton Briggs, Peter Bernstein, Charles Ellis, David Darst and Jeremy Siegel -- and reserve that mattress for some peaceful sleep.
Brad Trent
Peter Bernstein
Founder, Peter L. Bernstein Inc.
After almost six decades of contemplating market risk, Peter Bernstein knows how to spot investors' worst-case scenarios before they do. These days, what he sees concerns him deeply.
As the current economic crisis unfolds in ways that even the most bearish Wall Street strategists never predicted, Bernstein says any number of disasters could still be in store for investors. For those saving for retirement, in particular, taking protective measures is critical.
"The goal for investors right now should be survival, not making a killing," says Bernstein, who has been an economics professor and money manager, and is the author of several books, including Against the Gods, a classic on risk. "You should be thinking about how to hedge against extreme outcomes."
With markets down and unemployment and home foreclosures rising, what more could happen?
"A major bank failure, causing a run on banks in general," Bernstein speculates. Or "a run on the dollar, perhaps provoked by what foreigners view as too big a fiscal deficit."
Or runaway inflation or deflation, either of which could be disastrous for long-term retirement investors.
The next step of this crisis is hard to predict, Bernstein says, because the crisis is so unusual. "Nothing like this has ever happened before," he continues. "There have been credit crunches and housing crises and dollar crises, but having all the chickens coming home to roost at the same time and interacting with one another is unique. We have historical perspective on the parts, but not the whole, and that makes things both interesting and scary."
He suggests diversifying a portfolio so that it is not only exposed to many different markets, but also to ensure it can weather all kinds of scenarios.
For example, to guard against rampant inflation, every portfolio should contain at least a sprinkling of Treasury inflation-protected securities and short-term Treasuries, Bernstein suggests.
The TIPS come with a guaranteed return above inflation, and short-term Treasuries enable you to roll your money into higher-yielding issues every 90 days if inflation rises and interest rates follow.
"Short-term Treasuries aren't a very good holding under normal conditions, but they are a hedge against extreme conditions," Bernstein says. Long-term Treasuries are a good hedge against deflation, he adds.
Bernstein also recommends holding some gold as a hedge against a collapse in the value of the dollar if China or other nations decide they no longer want to invest as much in U.S. Treasuries. "In a total disaster, where there is a run from paper currency, you'll get your biggest bang for your buck in gold," he says.
You don't have to buy much gold to have an effective hedge, he adds, noting that "if everything hits the fan, gold could be worth several thousand dollars an ounce." It is now valued at about $750 an ounce.
Above all, don't let your defensive attitude waver, Bernstein counsels.
"Every day, we are faced by the possibility that something we never dreamed of will happen," he cautions.
"In 1958, I'd been in the business for seven years when, for the first time in history, bonds yielded more than stocks. My associates said, 'It's an anomaly, don't worry, it will be reversed.' It's 50 years later, and I'm still waiting."
Gary Spector
Charles Ellis
Founder, Greenwich Associates
In Japan, investors fill their stock portfolios primarily with Japanese companies. The French place their biggest bets on French companies. The story is the same in New Zealand, India, Russia, and around the globe: Investors favor their own countries' stocks.
For U.S. investors it's easy to criticize foreign investors for being provincial. But Charles Ellis, a former chair of Yale's Investment Committee and a consultant for institutional investors, has a suggestion for them: Look in the mirror.
The typical U.S. investor holds at least 85% of his stock portfolio in domestic stocks, even though the U.S. stock market accounts for only 40% to 45% of the world's total stock-market value.
"People feel more comfortable emphasizing their own country, because they recognize the company names," says Ellis, whose internationally renowned book is Winning the Loser's Game. "But from a pure investment point of view, it doesn't do any good" -- particularly for folks investing for retirement and other long-term goals, he says.
A U.S.-centric stock portfolio creates high levels of volatility, and denies investors the benefit of surging markets around the world, Ellis notes.
The best risk-adjusted returns over the long term can be scored by matching the market capitalization weightings of the world's markets, Ellis says. That would mean putting 45% in domestic stocks, 47% in developed foreign markets and 8% in developing foreign markets.
The idea is to have no bets on whether one market or another will be stronger in coming months.
"If you said, 'I don't really have a smart idea about the direction of the markets, I'm just a sensible person, what should I do?,' the answer is to go to a global index and start there," Ellis says. "If you have reason to make any changes from there...then you can adjust it from a neutral to an opinionated portfolio."
Traditionally, investors have been hesitant to plunge more deeply into foreign markets -- because of perceptions that foreign-currency exposure presents too much risk, foreign companies don't get enough oversight from their governments, and foreign markets are simply too volatile.
To Ellis, however, the truly global allocation of assets trumps all those concerns.
"There really is a free lunch, and it's called diversification," he says. "By diversifying, you reduce your risk substantially. It doesn't cost anything, and you get something for it."
Evan Kafka
Barton Biggs
Managing Partner, Traxis Partners
When the herd zigs, Barton Biggs zags. So it shouldn't be a surprise that while U.S. investors can't dump their technology stocks fast enough these days, Biggs has been declaring that now is the time to get into the trampled tech sector.
The best values right now, he says, are in large-cap, high-quality stocks around the world, "but particularly in the U.S., and within that category, technology appeals to me the most."
Biggs, co-founder and managing partner of the $1.3 billion hedge fund Traxis Partners in New York, is the former global investment strategist at Morgan Stanley.
"We've been in a period of stagnation in terms of tech spending since the bubble burst in 2000. The next recovery is going to be marked by unusual spending in all types of technology...and the sector will be one of the first areas to pick up as the U.S. and the world begin to recover," Biggs says.
A market recovery, he believes, will begin in the first half of 2009. By then, oil prices should be consistently below $120 a barrel, and the housing market should have started stabilizing.
Due to the government's takeover of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) -- which he characterizes as "one of the most important events of the last 20 years" -- further declines in home prices are likely to be more moderate than expected earlier.
But don't wait for an economic recovery in order to step into large domestic stocks and global tech stocks, or "the markets will already be up," Biggs says. "I wouldn't be surprised if later, in retrospect, we will find that the stock market is at its bottom about now."
Biggs is a notoriously trend-bucking strategist, which has sometimes paid off massively for those who follow him. In the late 1990s, he spared his clients huge losses by predicting the technology-driven bull market was going to plummet. And in 2003, when investors were steering clear of Japan, he moved into the Japanese stock market, adding untold wealth to clients' portfolios in the following three years as Japan soared.
Today, while many Wall Street strategists are recommending an underweighted position in stocks, Biggs is defiantly upbeat." The public has been selling stocks and has an incredible amount of liquidity, and so have institutions and hedge funds," he says.
"The fact that everyone is cautious has raised a lot of investable funds, and that's bullish," he adds. "We're in a stage where ordinary investors ought to be buying on weakness," says Biggs.
Some of his top picks: Cisco (CSCO), IBM (IBM) and Google (GOOG).
Biggs is steering clear, for now, of stocks in the materials, energy, agricultural and industrial- and oil-commodity sectors, but notes that "those will come on strong again -- but not until further into the recovery."
Dave Moser
Jeremy Siegel,
Professor, Wharton School
To most investors, dividend-paying stocks seem about as cutting edge as a corded telephone. Yet Jeremy Siegel talks about stock dividends with the enthusiasm and sense of discovery of a first-time iPhone user.
Through his recent research, Siegel, a finance professor at the University of Pennsylvania's Wharton School of Business, has become enamored of the dividend, and hopes to elevate its status from a humdrum staple for retirement-income seekers to a punch-packing contributor to younger investors' retirement portfolios.
He argues that the tendency of investors to look solely at the growth rates of earnings, sales and cash flow hurts them in the long run. The bias toward high-growth companies causes them to miss out on the high dividend-paying companies whose total returns, contrary to popular perception, have historically outshined the performance of growth stocks over time, he says.
"Everyone thinks it's old-fashioned to think about dividends, but investors have historically gotten about an extra two or three percentage points a year of higher returns by investing in the highest dividend-yielding stocks and reinvesting the dividends," says Siegel, author of The Future for Investors, Stocks for The Long Run, and other books.
One of his most striking examples is the difference in fortunes between people who invested in IBM rather than Standard Oil, now ExxonMobil (XOM), in 1950. Over the next five decades, through 2003, IBM trounced Standard Oil in per-share growth of revenue, dividends and earnings. But Standard Oil had a higher total return: A $1,000 investment in Standard Oil would have grown to $1.26 million with dividends reinvested, compared to $961,000 -- 24% less -- for IBM investors. "And that was before the recent energy price increases," Siegel says.
While financial companies historically have been reliable dividend payers, the dividends on Fannie Mae and Freddie Mac have been halted, and 21 financial-services firms have cut their payouts since the beginning of this year, according to Standard & Poor's. In a typical year, two or three financial firms cut their dividends, but the majority of them increase their payouts.
Long a supporter of index investing, Siegel now favors index funds that rebalance on a dividend-weighted basis. Siegel is a senior investment strategy adviser at WisdomTree, which has developed a series of funds that operate this way.
A dividend-weighted index rebalances regularly to favor stocks that pay the highest dividend. Most indexed portfolios, in contrast, rebalance based on the market capitalization of the stocks. With a dividend-weighted index, investors end up buying stocks when their prices are low relative to their fundamentals. A high dividend yield is a strong indication that a stock is undervalued, Siegel says.
Throughout history, dividend-paying stocks have gotten the spotlight. When the tech bubble burst in 2000, many investors sought out dividend-paying stocks to try to steady their portfolios. In 2003, payouts got a boost when the tax rate on dividends was changed to the 15% capital-gains rate, versus the higher income-tax rates.
Some of this tax benefit may get rolled back if Sen. Barack Obama (D.-Ill.) is elected president; he has said he would raise the dividend tax rate to 20% -- "but that's still a preferred rate," Siegel points out. He adds that investors who keep a steady spotlight on the high dividend-paying stocks in their portfolios are likely to have a brighter retirement.
Gary Spector
David Darst
Global Wealth Management Group,
Morgan Stanley
David Darst is the Iron Chef of the investment world. As chief investment strategist at Morgan Stanley's Global Wealth Management Group for the past 11 years and one of Wall Street's foremost experts on asset allocation, Darst spends much of his time considering the perfect ingredients -- of a portfolio, that is. He takes a little of this, blends it with a little of that, and -- voilà ! -- produces nourishing retirement portfolios.
Investors who have seen the air sucked out of their retirement portfolios lately might need convincing. The problem in the typical portfolio, Darst suspects, is that most people skimp on alternative investments like commodities, real estate and hedge funds.
"The perception is that they're too risky, but we view the benefits of alternatives more by the reduced volatility they bring to a portfolio than by an increased return," says Darst, who recommends that folks with $1 million to $20 million to allocate 20% to alternative investments, and those with less, 8%.
While any particular alternative investment may, indeed, be more volatile than the broad stock or bond markets, a portfolio diversified across stocks, fixed income, and a number of different alternatives will likely be less risky than one with fewer asset classes -- and it may even score higher returns, Darst says.
Consider a portfolio with 40% invested in stocks and the rest split between commodities and real estate. That may sound risky, but according to Ned Davis Research, in the 35 years through 2007, such a portfolio had the same risk as a portfolio with 40% invested in stocks and 60% in bonds. Yet it gained almost two percentage points more per year -- 12.47% versus 10.5%.
Within an alternative-investment portfolio, Darst recommends a 50% weighting in hedge funds, which gives investors the potential to benefit from talented money managers who have the freedom to invest where and how they see fit, without constraint.
Some 20% should be in real assets, such as commodities and gold. Both provide a hedge against inflation, and gold in particular has been a historic refuge in times of turmoil in the financial markets, political instability, or other crises.
Another 20% should be directed to managed-futures funds, Darst says. These invest by going long or short futures contracts in a broad basket of commodities and other investments, including metals, grains, sugar, foreign currencies, stocks and bonds.
Managed-futures funds provide a cushion to portfolios in down markets, because they typically are inversely related to the stock market, Darst says.
During the period 2000 to 2002, when the tech bubble burst and the Standard & Poor's 500 cratered 31%, the Barclay CTA Index of Managed Futures Funds was up 20%. In the fourth quarter of 1987, when the U.S. stock market crashed and the S&P 500 lost 22.5%, the Barclay index was up 13.8%. This year through August, the S&P 500 was down 14%, while the Barclay index was up 6.95%.
Lastly, Darst recommends placing 10% of a portfolio in Treasury inflation-protected securities to get their risk-dampening benefits, Darst says.
While he has usually included real estate in the alternative-investments portfolio through direct investments or REITs (real-estate investment trusts), he predicted enormous volatility in the sector last December and made a tactical move to eliminate real estate from his models.
For the average investor, however, it would take a rare event to prompt the removal of an asset class from the alternative-investments portfolio, because that could mean missing its next surge.
Says Darst: "You want to have all of your relatives at the table. Not just the 17-year-old singer in the family that everyone has always listened to, but the quiet nephew who turns out to win the Pulitzer Prize."
Follow advice like that, and investors themselves just might take home a prize.
E-mail comments to mail@barrons.com
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How Safe is Your Safe Deposit Box - from FDIC
From www.fdic.gov
The Key to Your Safe Deposit Box
If you think there isn't much to using a safe deposit box beyond putting keys in locks, you're in for a surprise. The safe deposit service may be tucked down in the basement or far corner of your bank, but in its own quiet way it is among the bank's most important offerings-- and among the most misunderstood.
While millions of Americans rent a safe deposit box, few pay attention to questions such as who could or should have access to a safe deposit box (especially in an emergency) and how the contents of the box are protected. About the only time people ever consider these issues is when there's a problem, and then it may be too late to prevent a loss.
To help you decide whether to use a safe deposit box, and how to use one wisely, FDIC Consumer News has put together the following questions and answers. Several of these questions came from our readers, in response to an appeal from us. We thank everyone who wrote in with questions or suggestions. (To keep things simple, our references to "banks" are intended to apply broadly to banks, savings institutions and credit unions.)
In or Out?
Why should I rent a safe deposit box?
It's a convenient place to store important items that would be difficult or impossible to replace. The box also offers privacy (only you know what's inside) and security. Although many people like to keep valuables close by in a closet, safe or file cabinet at home or in the office, these places probably are not as resistant to fire, water or theft. Also, some insurance companies charge lower insurance premiums on valuables kept in a bank's box instead of at home.
What items should go into a safe deposit box?
Any personal items that would cause you to say, "If I lose this, I'm in deep trouble." Important papers to consider putting into your box: originals of your insurance policies; family records such as birth, marriage and death certificates; original deeds, titles, mortgages, leases and other contracts; stocks, bonds and certificates of deposit (CDs). Other valuables worthy of a spot in your safe deposit box include special jewels, medals, rare stamps and other collectibles, negatives for irreplaceable photos, and videos or pictures of your home's contents for insurance purposes (in case of theft or damage).
OK, what should NOT go in a box?
Anything you might need in an emergency, in case your bank is closed for the night, the weekend or a holiday. Possible examples: originals of a "power of attorney" (your written authorization for another person to transact business on your behalf), passports (in case of an emergency trip), medical-care directives if you become ill and incapacitated, and funeral or burial instructions you make. Consider giving the originals to your attorney, and making copies to go in your safe deposit box or to give a close friend or relative.
If I have a will, shouldn't it go in my safe deposit box?
Whether your will should be at the bank or elsewhere, such as with your attorney, depends on what your state law says about who has access to your safe deposit box when you die. Ideally, the person you name to oversee your financial matters after you die (your "executor" or "personal representative") should have early access to your original will (copies aren't valid). David P. McGuinn, president of Houston-based Safe Deposit Specialists, a consultant to banks and consumer groups, says the recent trend in most states is to make it relatively easy for co-renters, family members or the executor to remove the will and certain other documents (such as life insurance policies and burial instructions) from a deceased person's safe deposit box. In those states, it's a good idea to leave your will in the safe deposit box. "But in some states," McGuinn notes, "it may require a court order or another official action to remove the will, which can take time and money. That's why you should check with a bank official to find out what is required under state law and your bank's own policies in the event of your death."
Access by Others
Can I arrange for someone to access my box in an emergency?
Yes. You can jointly rent your box with a spouse, child or other person who would have unrestricted access to the box. (Warning: In some states your co-renter may face delays in accessing the box if you die. Also, merely giving someone else a key won't be enough to grant access. He or she also must sign the bank's rental contract as a joint-renter.) An alternative is to appoint a "deputy" or "agent" (NOT a power of attorney) who will have access to your box. A deputy/agent and a general power of attorney are similar in that you may grant or revoke the authority at any time, and the appointment ends if you become incompetent or die. The main difference is that a deputy or agent is appointed in the presence of the box renters and a bank employee, which gives the bank greater assurance about the validity of the authorization. "Many people are surprised to find that a power of attorney does not allow access to a box," says Donald Sansone, a Chicago banker who specializes in safe deposit issues. "The bank has no way of knowing if the power of attorney is still in effect or if the renter was competent when the power of attorney was signed."
Can law enforcement authorities access my safe deposit box without my knowledge or permission?
Mark Mellon, an attorney with the FDIC in Washington, says that if a local, state or federal law enforcement agency persuades the appropriate court that there's "reasonable cause" to suspect you're hiding something illegal in your box (guns, drugs, explosives, stolen cash or money obtained illegally), "it can obtain a court order, force the box open and seize the contents." But what about non-criminal matters, such as a dispute with the Internal Revenue Service, a company or other people over money they say you owe? McGuinn of Safe Deposit Specialists says the IRS can "freeze" your assets (effectively placing a hold on your bank accounts and safe deposit box) until the dispute is resolved. Private parties also can freeze your assets but doing so involves going before a judge and proving that there's a legitimate dispute over a debt.
Can a box be declared "abandoned" and the contents turned over to the government?
Yes, but only if you don't pay your rental fee for a number of years (as determined by state law) and after attempts to notify and locate you prove unsuccessful. In that case, your box will be reported as abandoned and the contents will be turned over to the state's unclaimed property office. Often this happens because the renter dies and the heirs have no knowledge of the box or its contents. The good news is that even if the state has sold your unclaimed property, you or your heirs still have the right to claim its value. To contact a state's unclaimed property office (sometimes part of the treasurer's office), check the state government section in your phone book. On the Internet, go to the home page of the National Association of Unclaimed Property Administrators.
What happens to my box if my bank fails?
When an insured bank or thrift closes, the FDIC usually arranges for another institution to take it over, including branches where you might have a safe deposit box. In those situations, you should be able to conduct business as usual. If the FDIC cannot find a buyer for your bank, it arranges for you to remove the contents of your box so you can obtain a box at another institution, if you wish. This is done within a few days after the bank fails.
How Safe?
Are safe deposit boxes protected from fire, flood or other disasters?
The companies that manufacture safe deposit boxes and the vaults that house the boxes make them highly "resistant" to fire, flood, heat, earthquakes, hurricanes, explosions or other disastrous conditions. However, the key word here is "resistant." There's no 100 percent guarantee against damage, and substantial losses sometimes occur.
Are there extra precautions I can take to minimize damage?
Yes. McGuinn offers this advice: Prevent water damage by sealing items in airtight, zip-lock bags or Tupperware-style containers. Also, put your name on each item, keep a list of the box's contents, make copies of important documents and even take photos of your most prized items left in the box. That way, McGuinn says, if a disaster occurs your chances of successfully identifying, claiming or recovering an item would be increased.
Doesn't FDIC insurance cover the contents of safe deposit boxes if they're damaged or stolen?
No. By law, the FDIC only insures deposits in deposit accounts at insured institutions. Although you may be putting valuables, including cash and checks, into an area of the bank that has the word deposit in its name, these are not deposits under the insurance laws that the bank can use, for example, to make loans to other customers. A safe deposit box is strictly a storage space provided by the bank.
Does anyone insure my safe deposit box against damage or theft?
Unless your bank is found to be negligent in the way it handled or protected your safe deposit box, do not expect the bank or its private insurance to reimburse you for any damage or loss. If you're concerned about the safety or replacement of the items in your box, first check whether your own homeowner's or tenant's insurance policy covers your safe deposit box against damage or theft. Many do cover box contents up to a certain dollar amount, even including items lost or damaged when they're out of the box. If your home-related insurance isn't sufficient, talk to your insurance agent about additional protection or find out if your bank is among those selling limited insurance coverage on safe deposit boxes. But before buying any extra coverage, carefully review the policy and do some comparison-shopping.
Can thieves rob a safe deposit box?
Yes, it happens, but fortunately not often. Safe deposit boxes are stored in concrete or steel vaults equipped with sophisticated alarms, locks, video cameras, motion sensors, heat detectors and other security devices. Most U.S. banks also have very strict access procedures, among them: verifying signatures, restricting access to the vault, never leaving anyone unattended inside the vault, and requiring two different keys (one being the bank's "guard key") to open a box. You can do your part to prevent a rip-off by following our recommendations to consumers below.
Final Thoughts
It's smart to want to protect irreplaceable documents and valuable possessions, for yourself
and your heirs. We hope this report has given you answers and ideas to make you even
smarter- and safer- when it comes to making decisions about a safe deposit box.
Making Your Safe Deposit Box Even Safer
These simple measures should prevent thefts from your safe deposit box
Before renting a box: Read the security and operating procedures in your rental contract. Talk to the vault attendant about access procedures and security devices until you are comfortable with the level of protection. ''Observe such things as whether customers, locksmiths or other people are left alone inside the vault, which may give them an opportunity to tamper with the locks," says Kate Spears of the FDIC's Division of Compliance and Consumer Affairs in Washington. ''Nowadays, devices such as electronic lock-picks or other special tools can be used in a flash and leave no sign of tampering— except that the contents of the box are missing." Also, make sure the bank's safe deposit area has a ''viewing" room or booth outside of the vault that you can use to inspect your box's contents in privacy and safety.
At home: Keep your two safe deposit box keys apart from each other and in safe places (not with your house keys or car keys). Don't keep your keys on a key ring or in an envelope that would indicate the bank's name or the location of your box. Give your extra key only to someone you trust. ''If even one of your keys is lost," says Chicago banker Donald Sansone, ''notify the bank immediately so their personnel are on alert against someone trying to perpetrate a fraud." If both keys are lost, you should get a new box (and be prepared to pay to have your old box drilled open). Keep written and photographic records of your box's contents at home, in case any items are lost and you need to file a claim. Also check your home insurance policy to see if it covers the items in your box against loss or damage.
Inside the vault: Accompany the bank employee into the vault, and be sure no other customers are there with you. After you arrive at the vault, it's OK to give the attendant your key for the few seconds it takes to open or close the box door, but never lose sight of the key and never leave it in the box door. An unscrupulous attendant or dishonest customer only needs a few seconds to make a wax impression of your key, which can be used to make a duplicate. Also, never let a bank employee take the box out of your sight. When you return your box to the vault, be sure the box door is properly locked and that you have your key before you leave. ''Don't allow a bank employee to keep your key and handle transactions for you if you're not there— something elderly customers have done and regretted," adds Carol Mesheske, chief of a section in the FDIC's Division of Supervision that monitors fraudulent activities at banks.
Outside the vault: Only open the safe deposit box when you're inside the viewing booth and away from bank employees and customers. ''Before leaving the privacy booth, make sure all valuables are safely back inside the box," recommends Gene Seitz, also of the FDIC's anti-fraud group. ''And make sure there's nothing left behind that may indicate the contents of your box, such as a currency strap, a specially-marked envelope or an empty jewelry box."
If there's a problem: Tell a bank manager if the vault attendant seems a bit lax in following security procedures or if you spot something suspicious going on. Immediately report to the manager any items you believe are missing from your box or if there are signs of unauthorized or forced entry. If you're pretty sure you've been victimized, it's also a good idea to contact the National Fraud Information Center (phone: 800-876-7060), which reports suspected crimes to law enforcement agencies. If your bank doesn't resolve the matter to your satisfaction, you may contact its federal regulator.
The Key to Your Safe Deposit Box
If you think there isn't much to using a safe deposit box beyond putting keys in locks, you're in for a surprise. The safe deposit service may be tucked down in the basement or far corner of your bank, but in its own quiet way it is among the bank's most important offerings-- and among the most misunderstood.
While millions of Americans rent a safe deposit box, few pay attention to questions such as who could or should have access to a safe deposit box (especially in an emergency) and how the contents of the box are protected. About the only time people ever consider these issues is when there's a problem, and then it may be too late to prevent a loss.
To help you decide whether to use a safe deposit box, and how to use one wisely, FDIC Consumer News has put together the following questions and answers. Several of these questions came from our readers, in response to an appeal from us. We thank everyone who wrote in with questions or suggestions. (To keep things simple, our references to "banks" are intended to apply broadly to banks, savings institutions and credit unions.)
In or Out?
Why should I rent a safe deposit box?
It's a convenient place to store important items that would be difficult or impossible to replace. The box also offers privacy (only you know what's inside) and security. Although many people like to keep valuables close by in a closet, safe or file cabinet at home or in the office, these places probably are not as resistant to fire, water or theft. Also, some insurance companies charge lower insurance premiums on valuables kept in a bank's box instead of at home.
What items should go into a safe deposit box?
Any personal items that would cause you to say, "If I lose this, I'm in deep trouble." Important papers to consider putting into your box: originals of your insurance policies; family records such as birth, marriage and death certificates; original deeds, titles, mortgages, leases and other contracts; stocks, bonds and certificates of deposit (CDs). Other valuables worthy of a spot in your safe deposit box include special jewels, medals, rare stamps and other collectibles, negatives for irreplaceable photos, and videos or pictures of your home's contents for insurance purposes (in case of theft or damage).
OK, what should NOT go in a box?
Anything you might need in an emergency, in case your bank is closed for the night, the weekend or a holiday. Possible examples: originals of a "power of attorney" (your written authorization for another person to transact business on your behalf), passports (in case of an emergency trip), medical-care directives if you become ill and incapacitated, and funeral or burial instructions you make. Consider giving the originals to your attorney, and making copies to go in your safe deposit box or to give a close friend or relative.
If I have a will, shouldn't it go in my safe deposit box?
Whether your will should be at the bank or elsewhere, such as with your attorney, depends on what your state law says about who has access to your safe deposit box when you die. Ideally, the person you name to oversee your financial matters after you die (your "executor" or "personal representative") should have early access to your original will (copies aren't valid). David P. McGuinn, president of Houston-based Safe Deposit Specialists, a consultant to banks and consumer groups, says the recent trend in most states is to make it relatively easy for co-renters, family members or the executor to remove the will and certain other documents (such as life insurance policies and burial instructions) from a deceased person's safe deposit box. In those states, it's a good idea to leave your will in the safe deposit box. "But in some states," McGuinn notes, "it may require a court order or another official action to remove the will, which can take time and money. That's why you should check with a bank official to find out what is required under state law and your bank's own policies in the event of your death."
Access by Others
Can I arrange for someone to access my box in an emergency?
Yes. You can jointly rent your box with a spouse, child or other person who would have unrestricted access to the box. (Warning: In some states your co-renter may face delays in accessing the box if you die. Also, merely giving someone else a key won't be enough to grant access. He or she also must sign the bank's rental contract as a joint-renter.) An alternative is to appoint a "deputy" or "agent" (NOT a power of attorney) who will have access to your box. A deputy/agent and a general power of attorney are similar in that you may grant or revoke the authority at any time, and the appointment ends if you become incompetent or die. The main difference is that a deputy or agent is appointed in the presence of the box renters and a bank employee, which gives the bank greater assurance about the validity of the authorization. "Many people are surprised to find that a power of attorney does not allow access to a box," says Donald Sansone, a Chicago banker who specializes in safe deposit issues. "The bank has no way of knowing if the power of attorney is still in effect or if the renter was competent when the power of attorney was signed."
Can law enforcement authorities access my safe deposit box without my knowledge or permission?
Mark Mellon, an attorney with the FDIC in Washington, says that if a local, state or federal law enforcement agency persuades the appropriate court that there's "reasonable cause" to suspect you're hiding something illegal in your box (guns, drugs, explosives, stolen cash or money obtained illegally), "it can obtain a court order, force the box open and seize the contents." But what about non-criminal matters, such as a dispute with the Internal Revenue Service, a company or other people over money they say you owe? McGuinn of Safe Deposit Specialists says the IRS can "freeze" your assets (effectively placing a hold on your bank accounts and safe deposit box) until the dispute is resolved. Private parties also can freeze your assets but doing so involves going before a judge and proving that there's a legitimate dispute over a debt.
Can a box be declared "abandoned" and the contents turned over to the government?
Yes, but only if you don't pay your rental fee for a number of years (as determined by state law) and after attempts to notify and locate you prove unsuccessful. In that case, your box will be reported as abandoned and the contents will be turned over to the state's unclaimed property office. Often this happens because the renter dies and the heirs have no knowledge of the box or its contents. The good news is that even if the state has sold your unclaimed property, you or your heirs still have the right to claim its value. To contact a state's unclaimed property office (sometimes part of the treasurer's office), check the state government section in your phone book. On the Internet, go to the home page of the National Association of Unclaimed Property Administrators.
What happens to my box if my bank fails?
When an insured bank or thrift closes, the FDIC usually arranges for another institution to take it over, including branches where you might have a safe deposit box. In those situations, you should be able to conduct business as usual. If the FDIC cannot find a buyer for your bank, it arranges for you to remove the contents of your box so you can obtain a box at another institution, if you wish. This is done within a few days after the bank fails.
How Safe?
Are safe deposit boxes protected from fire, flood or other disasters?
The companies that manufacture safe deposit boxes and the vaults that house the boxes make them highly "resistant" to fire, flood, heat, earthquakes, hurricanes, explosions or other disastrous conditions. However, the key word here is "resistant." There's no 100 percent guarantee against damage, and substantial losses sometimes occur.
Are there extra precautions I can take to minimize damage?
Yes. McGuinn offers this advice: Prevent water damage by sealing items in airtight, zip-lock bags or Tupperware-style containers. Also, put your name on each item, keep a list of the box's contents, make copies of important documents and even take photos of your most prized items left in the box. That way, McGuinn says, if a disaster occurs your chances of successfully identifying, claiming or recovering an item would be increased.
Doesn't FDIC insurance cover the contents of safe deposit boxes if they're damaged or stolen?
No. By law, the FDIC only insures deposits in deposit accounts at insured institutions. Although you may be putting valuables, including cash and checks, into an area of the bank that has the word deposit in its name, these are not deposits under the insurance laws that the bank can use, for example, to make loans to other customers. A safe deposit box is strictly a storage space provided by the bank.
Does anyone insure my safe deposit box against damage or theft?
Unless your bank is found to be negligent in the way it handled or protected your safe deposit box, do not expect the bank or its private insurance to reimburse you for any damage or loss. If you're concerned about the safety or replacement of the items in your box, first check whether your own homeowner's or tenant's insurance policy covers your safe deposit box against damage or theft. Many do cover box contents up to a certain dollar amount, even including items lost or damaged when they're out of the box. If your home-related insurance isn't sufficient, talk to your insurance agent about additional protection or find out if your bank is among those selling limited insurance coverage on safe deposit boxes. But before buying any extra coverage, carefully review the policy and do some comparison-shopping.
Can thieves rob a safe deposit box?
Yes, it happens, but fortunately not often. Safe deposit boxes are stored in concrete or steel vaults equipped with sophisticated alarms, locks, video cameras, motion sensors, heat detectors and other security devices. Most U.S. banks also have very strict access procedures, among them: verifying signatures, restricting access to the vault, never leaving anyone unattended inside the vault, and requiring two different keys (one being the bank's "guard key") to open a box. You can do your part to prevent a rip-off by following our recommendations to consumers below.
Final Thoughts
It's smart to want to protect irreplaceable documents and valuable possessions, for yourself
and your heirs. We hope this report has given you answers and ideas to make you even
smarter- and safer- when it comes to making decisions about a safe deposit box.
Making Your Safe Deposit Box Even Safer
These simple measures should prevent thefts from your safe deposit box
Before renting a box: Read the security and operating procedures in your rental contract. Talk to the vault attendant about access procedures and security devices until you are comfortable with the level of protection. ''Observe such things as whether customers, locksmiths or other people are left alone inside the vault, which may give them an opportunity to tamper with the locks," says Kate Spears of the FDIC's Division of Compliance and Consumer Affairs in Washington. ''Nowadays, devices such as electronic lock-picks or other special tools can be used in a flash and leave no sign of tampering— except that the contents of the box are missing." Also, make sure the bank's safe deposit area has a ''viewing" room or booth outside of the vault that you can use to inspect your box's contents in privacy and safety.
At home: Keep your two safe deposit box keys apart from each other and in safe places (not with your house keys or car keys). Don't keep your keys on a key ring or in an envelope that would indicate the bank's name or the location of your box. Give your extra key only to someone you trust. ''If even one of your keys is lost," says Chicago banker Donald Sansone, ''notify the bank immediately so their personnel are on alert against someone trying to perpetrate a fraud." If both keys are lost, you should get a new box (and be prepared to pay to have your old box drilled open). Keep written and photographic records of your box's contents at home, in case any items are lost and you need to file a claim. Also check your home insurance policy to see if it covers the items in your box against loss or damage.
Inside the vault: Accompany the bank employee into the vault, and be sure no other customers are there with you. After you arrive at the vault, it's OK to give the attendant your key for the few seconds it takes to open or close the box door, but never lose sight of the key and never leave it in the box door. An unscrupulous attendant or dishonest customer only needs a few seconds to make a wax impression of your key, which can be used to make a duplicate. Also, never let a bank employee take the box out of your sight. When you return your box to the vault, be sure the box door is properly locked and that you have your key before you leave. ''Don't allow a bank employee to keep your key and handle transactions for you if you're not there— something elderly customers have done and regretted," adds Carol Mesheske, chief of a section in the FDIC's Division of Supervision that monitors fraudulent activities at banks.
Outside the vault: Only open the safe deposit box when you're inside the viewing booth and away from bank employees and customers. ''Before leaving the privacy booth, make sure all valuables are safely back inside the box," recommends Gene Seitz, also of the FDIC's anti-fraud group. ''And make sure there's nothing left behind that may indicate the contents of your box, such as a currency strap, a specially-marked envelope or an empty jewelry box."
If there's a problem: Tell a bank manager if the vault attendant seems a bit lax in following security procedures or if you spot something suspicious going on. Immediately report to the manager any items you believe are missing from your box or if there are signs of unauthorized or forced entry. If you're pretty sure you've been victimized, it's also a good idea to contact the National Fraud Information Center (phone: 800-876-7060), which reports suspected crimes to law enforcement agencies. If your bank doesn't resolve the matter to your satisfaction, you may contact its federal regulator.
Protection for Credit Union Accounts - from National Credit Union Association (NCUA)
http://webapps.ncua.gov/
What is the Standard Maximum Share Insurance Amount or SMSIA for NCUSIF share insurance coverage?
The SMSIA for a credit union member is defined in NCUA’s Rules and Regulations, as $100,000 and may be increased from time to time. Share accounts maintained in different rights or capacities, or forms of ownership, may each be separately insured up to the $100,000 SMSIA, or in the case of certain retirement accounts, up to $250,000. Thus, a member may hold or have an interest in more than one separately insured share account in the same insured credit union.
What types of accounts are insured?
All types of member share accounts and deposits received by the credit union in its usual course of business, including regular shares, share certificates, and share draft accounts are insured. Investment products offered by a credit union to its members, such as mutual funds, annuities, and other non-deposit investments are not insured by the NCUSIF.
Is NCUSIF share insurance coverage increased by placing funds in two or more of the same kind of share accounts in the same credit union?
No. NCUSIF share insurance is not increased merely by dividing funds owned by the same person or persons into one or more of the different kinds of share accounts available. For example, a regular share account, a share draft account and a share certificate account owned by the same member are added together and insured up to the $100,000 SMSIA. Insurance can be increased by opening a different type of account - one that is held in a different right and capacity. For example, insurance on a single ownership account is separate from insurance on a joint account.
If a member has accounts in several different insured credit unions, will the accounts be added together for the purpose of insurance coverage?
No. Share insurance is applied to share accounts in each insured credit union. A member who has share accounts in two or more different insured credit unions would have coverage up to the full insurable amount in each credit union. In the case of a credit union having one or more branches, the main office and all branch offices are considered as one credit union.
What is the Standard Maximum Share Insurance Amount or SMSIA for NCUSIF share insurance coverage?
The SMSIA for a credit union member is defined in NCUA’s Rules and Regulations, as $100,000 and may be increased from time to time. Share accounts maintained in different rights or capacities, or forms of ownership, may each be separately insured up to the $100,000 SMSIA, or in the case of certain retirement accounts, up to $250,000. Thus, a member may hold or have an interest in more than one separately insured share account in the same insured credit union.
What types of accounts are insured?
All types of member share accounts and deposits received by the credit union in its usual course of business, including regular shares, share certificates, and share draft accounts are insured. Investment products offered by a credit union to its members, such as mutual funds, annuities, and other non-deposit investments are not insured by the NCUSIF.
Is NCUSIF share insurance coverage increased by placing funds in two or more of the same kind of share accounts in the same credit union?
No. NCUSIF share insurance is not increased merely by dividing funds owned by the same person or persons into one or more of the different kinds of share accounts available. For example, a regular share account, a share draft account and a share certificate account owned by the same member are added together and insured up to the $100,000 SMSIA. Insurance can be increased by opening a different type of account - one that is held in a different right and capacity. For example, insurance on a single ownership account is separate from insurance on a joint account.
If a member has accounts in several different insured credit unions, will the accounts be added together for the purpose of insurance coverage?
No. Share insurance is applied to share accounts in each insured credit union. A member who has share accounts in two or more different insured credit unions would have coverage up to the full insurable amount in each credit union. In the case of a credit union having one or more branches, the main office and all branch offices are considered as one credit union.
Information from FDIC - Federal Deposit Insurance Corporation
Insuring Your Deposits
(from www.fdic.gov)
What Is the FDIC?
The FDIC – short for the Federal Deposit Insurance Corporation – is an independent agency of the United States government. The FDIC protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government. The term “insured bank” is used in this brochure to mean any bank or savings association with FDIC insurance.
To check whether your bank or savings association is insured by FDIC, call toll-free 1-877-275-3342, use "Bank Find" at www.fdic.gov/deposit/index.html, or look for the official FDIC sign where deposits are received.
Why Is FDIC Insurance Important to You?
All FDIC-insured banks must meet high standards for financial strength and stability. The FDIC, with other federal and state regulatory agencies, regularly reviews the operations of insured banks to ensure these standards are met. Even with these safeguards, some insured banks fail. If your insured bank fails, FDIC insurance will cover your deposits, dollar for dollar, including principal and any accrued interest, up to the insurance limit.
Historically, insured deposits are available to customers of a failed bank within just a few days. Since the start of the FDIC in 1933, no depositor has ever lost a penny of insured deposits.
What Does the FDIC Insure?
The FDIC insures all deposits at insured banks, including checking, NOW and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit.
The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from an insured bank.
Basic Insurance Amount Is $100,000
The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
If you and your family have $100,000 or less in all of your deposit accounts at the same insured bank, you do not need to worry about your insurance coverage -- your deposits are fully insured.
Coverage Over $100,000
The FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership.
You may qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories.
Common Ownership Categories
The most common ownership categories are:
Single Accounts
Certain Retirement Accounts
Joint Accounts
Revocable Trust Accounts
Single Accounts
These are deposit accounts owned by one person and titled in that person’s name only. All of your single accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if you have a checking account and a CD at the same insured bank, and both accounts are in your name only, the two accounts are added together and the total is insured up to $100,000.
Note: Retirement accounts and qualifying trust accounts are not included in this ownership category.
Certain Retirement Accounts
These are deposit accounts owned by one person and titled in the name of that person’s retirement plan. Only the following types of retirement plans are insured in this ownership category:
Individual Retirement Accounts (IRAs) including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs
Section 457 deferred compensation plan accounts (whether self-directed or not)
Self-directed defined contribution plan accounts
Self-directed Keogh plan (or H.R. 10 plan) accounts
All deposits that an individual has in any of the types of retirement plans listed above at the same insured bank are added together and the total is insured up to $250,000. For example, if an individual has an IRA and a self-directed Keogh account at the same bank, the deposits in both accounts would be added together and insured up to $250,000.
Naming beneficiaries on a retirement account does not increase deposit insurance coverage.
Joint Accounts
These are deposit accounts owned by two or more people. If both owners have equal rights to withdraw money from a joint account, each person’s shares of all joint accounts at the same insured bank are added together and the total is insured up to $100,000.
If a couple has a joint checking account and a joint savings account at the same insured bank, each co-owner's shares of the two accounts are added together and insured up to $100,000, providing up to $200,000 in coverage for the couple's joint accounts.
Example: John and Mary have a $220,000 CD at an insured bank. Under FDIC rules, each person's share of each joint account is considered equal unless otherwise stated in the bank’s records. John and Mary each own $110,000 in the joint account category, putting a total of $20,000 ($10,000 for each) over the insurance limit.
Account Holders Ownership Share Amount Insured Amount Uninsured
John $ 110,000 $ 100,000 $ 10,000
Mary $ 110,000 $ 100,000 $ 10,000
Total $ 220,000 $ 200,000 $ 20,000
Note: Jointly owned qualifying trust accounts are not included in this ownership category.
Revocable Trust Accounts
These are deposits held in either payable-on-death (POD) accounts or living trust accounts.
Payable-on-death (POD) accounts – also known as testamentary or Totten Trust accounts – are the most common form of revocable trust deposits. These informal revocable trusts are created when the account owner signs an agreement – usually part of the bank's signature card – stating that the deposits will be payable to one or more named beneficiaries upon the owner's death.
Living trusts – or family trusts – are formal revocable trusts created for estate planning purposes. The owner of a living trust controls the deposits in the trust during his or her lifetime.
Note: Determining coverage for living trust accounts can be complicated and requires more detailed information about the FDIC's insurance rules than can be provided in this publication. If you have a living trust account, contact the FDIC at 1-877-275-3342 for more information.
Deposit insurance coverage for revocable trust accounts is based on each owner's trust relationship with each qualifying beneficiary. While the trust owner is the insured party, coverage is provided for the interests of each beneficiary in the account. The FDIC insures the interests of each beneficiary up to $100,000 for each owner if all of the following requirements are met:
The beneficiary is the owner's spouse, child, grandchild, parent, or sibling. Adopted and stepchildren, grandchildren, parents, and siblings also qualify. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities), and trusts do not qualify.
The account title must indicate the existence of the trust relationship by including a term such as payable on death, in trust for, trust, living trust, family trust, or an acronym such as POD or ITF.
For POD accounts, each beneficiary must be identified by name in the bank's account records.
If any of these requirements are not met, the entire amount in the account, or any portion of the account that does not qualify, would be added to the owner's other single accounts, if any, at the same bank and insured up to $100,000. If the revocable trust account has more than one owner, the FDIC would insure each owner's share as his or her single account.
Note: The following example applies to POD accounts only. Coverage may be different for some living trusts.
Example: Bill has a $100,000 POD account with his wife Sue as beneficiary. Sue has a $100,000 POD account with Bill as beneficiary. In addition, Bill and Sue jointly have a $600,000 POD account with their three children as equal beneficiaries.
Account Title Account Balance Amount Insured Amount Uninsured
Bill POD to Sue $ 100,000 $ 100,000 $ 0
Sue POD to Bill $ 100,000 $ 100,000 $ 0
Bill & Sue POD to 3 children $ 600,000 $ 600,000 $ 0
Total $ 800,000 $ 800,000 $ 0
These three accounts totaling $800,000 are fully insured because each owner is entitled to $100,000 of coverage for the interests of each qualifying beneficiary in the accounts. Bill has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – his wife in the first account and his three children in the third account). Sue also has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – her husband in the second account and her three children in the third account).
When calculating coverage for revocable trust accounts, be careful to avoid these common mistakes:
Do not assume that coverage is calculated as $100,000 times the number of people –owner(s) and beneficiary(ies) – named on a trust account. Coverage is provided for the interest of each qualifying beneficiary named by each owner. Additional coverage is not provided to the owners for naming themselves as owners. For example, a father's POD account naming two sons as equal beneficiaries is insured to $200,000 only -- $100,000 for the interest of each qualifying beneficiary.
Do not assume that the FDIC insures POD and living trust accounts separately. In applying the $100,000 per-beneficiary insurance limit, the FDIC combines an owner's POD accounts with the living trust accounts that name the same beneficiaries at the same bank.
For More Information from the FDIC
Call toll-free at:
1-877-ASK-FDIC (1-877-275-3342)
from 8 am until 8 pm (Eastern Time)
Monday through Friday
Hearing Impaired Line:
1-800-925-4618
Calculate your insurance coverage using the FDIC's online Electronic Deposit Insurance Estimator at: www2.fdic.gov/edie
Request a copy of "Your Insured Deposits: FDIC's Guide to Deposit Insurance Coverage," which provides a detailed description of the ownership categories, by calling toll free at: 1-877-275-3342
For downloadable, camera-ready files of "Your Insured Deposit" and "Insuring Your Deposit," visit " Reprintable FDIC Brochures" at www.fdic.gov, "About FDIC."
Read more about FDIC insurance online at: www.fdic.gov/deposit/deposits
Order FDIC deposit insurance products online at www2.fdic.gov/depositinsuranceregister
Send your questions by e-mail using the FDIC's online Customer Assistance Form at: www2.fdic.gov/starsmail
Mail your questions to:
Federal Deposit Insurance Corporation
Attn: Deposit Insurance Outreach
550 17th Street, NW
Washington, DC 20429-9990
(from www.fdic.gov)
What Is the FDIC?
The FDIC – short for the Federal Deposit Insurance Corporation – is an independent agency of the United States government. The FDIC protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government. The term “insured bank” is used in this brochure to mean any bank or savings association with FDIC insurance.
To check whether your bank or savings association is insured by FDIC, call toll-free 1-877-275-3342, use "Bank Find" at www.fdic.gov/deposit/index.html, or look for the official FDIC sign where deposits are received.
Why Is FDIC Insurance Important to You?
All FDIC-insured banks must meet high standards for financial strength and stability. The FDIC, with other federal and state regulatory agencies, regularly reviews the operations of insured banks to ensure these standards are met. Even with these safeguards, some insured banks fail. If your insured bank fails, FDIC insurance will cover your deposits, dollar for dollar, including principal and any accrued interest, up to the insurance limit.
Historically, insured deposits are available to customers of a failed bank within just a few days. Since the start of the FDIC in 1933, no depositor has ever lost a penny of insured deposits.
What Does the FDIC Insure?
The FDIC insures all deposits at insured banks, including checking, NOW and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit.
The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from an insured bank.
Basic Insurance Amount Is $100,000
The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
If you and your family have $100,000 or less in all of your deposit accounts at the same insured bank, you do not need to worry about your insurance coverage -- your deposits are fully insured.
Coverage Over $100,000
The FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership.
You may qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories.
Common Ownership Categories
The most common ownership categories are:
Single Accounts
Certain Retirement Accounts
Joint Accounts
Revocable Trust Accounts
Single Accounts
These are deposit accounts owned by one person and titled in that person’s name only. All of your single accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if you have a checking account and a CD at the same insured bank, and both accounts are in your name only, the two accounts are added together and the total is insured up to $100,000.
Note: Retirement accounts and qualifying trust accounts are not included in this ownership category.
Certain Retirement Accounts
These are deposit accounts owned by one person and titled in the name of that person’s retirement plan. Only the following types of retirement plans are insured in this ownership category:
Individual Retirement Accounts (IRAs) including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs
Section 457 deferred compensation plan accounts (whether self-directed or not)
Self-directed defined contribution plan accounts
Self-directed Keogh plan (or H.R. 10 plan) accounts
All deposits that an individual has in any of the types of retirement plans listed above at the same insured bank are added together and the total is insured up to $250,000. For example, if an individual has an IRA and a self-directed Keogh account at the same bank, the deposits in both accounts would be added together and insured up to $250,000.
Naming beneficiaries on a retirement account does not increase deposit insurance coverage.
Joint Accounts
These are deposit accounts owned by two or more people. If both owners have equal rights to withdraw money from a joint account, each person’s shares of all joint accounts at the same insured bank are added together and the total is insured up to $100,000.
If a couple has a joint checking account and a joint savings account at the same insured bank, each co-owner's shares of the two accounts are added together and insured up to $100,000, providing up to $200,000 in coverage for the couple's joint accounts.
Example: John and Mary have a $220,000 CD at an insured bank. Under FDIC rules, each person's share of each joint account is considered equal unless otherwise stated in the bank’s records. John and Mary each own $110,000 in the joint account category, putting a total of $20,000 ($10,000 for each) over the insurance limit.
Account Holders Ownership Share Amount Insured Amount Uninsured
John $ 110,000 $ 100,000 $ 10,000
Mary $ 110,000 $ 100,000 $ 10,000
Total $ 220,000 $ 200,000 $ 20,000
Note: Jointly owned qualifying trust accounts are not included in this ownership category.
Revocable Trust Accounts
These are deposits held in either payable-on-death (POD) accounts or living trust accounts.
Payable-on-death (POD) accounts – also known as testamentary or Totten Trust accounts – are the most common form of revocable trust deposits. These informal revocable trusts are created when the account owner signs an agreement – usually part of the bank's signature card – stating that the deposits will be payable to one or more named beneficiaries upon the owner's death.
Living trusts – or family trusts – are formal revocable trusts created for estate planning purposes. The owner of a living trust controls the deposits in the trust during his or her lifetime.
Note: Determining coverage for living trust accounts can be complicated and requires more detailed information about the FDIC's insurance rules than can be provided in this publication. If you have a living trust account, contact the FDIC at 1-877-275-3342 for more information.
Deposit insurance coverage for revocable trust accounts is based on each owner's trust relationship with each qualifying beneficiary. While the trust owner is the insured party, coverage is provided for the interests of each beneficiary in the account. The FDIC insures the interests of each beneficiary up to $100,000 for each owner if all of the following requirements are met:
The beneficiary is the owner's spouse, child, grandchild, parent, or sibling. Adopted and stepchildren, grandchildren, parents, and siblings also qualify. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities), and trusts do not qualify.
The account title must indicate the existence of the trust relationship by including a term such as payable on death, in trust for, trust, living trust, family trust, or an acronym such as POD or ITF.
For POD accounts, each beneficiary must be identified by name in the bank's account records.
If any of these requirements are not met, the entire amount in the account, or any portion of the account that does not qualify, would be added to the owner's other single accounts, if any, at the same bank and insured up to $100,000. If the revocable trust account has more than one owner, the FDIC would insure each owner's share as his or her single account.
Note: The following example applies to POD accounts only. Coverage may be different for some living trusts.
Example: Bill has a $100,000 POD account with his wife Sue as beneficiary. Sue has a $100,000 POD account with Bill as beneficiary. In addition, Bill and Sue jointly have a $600,000 POD account with their three children as equal beneficiaries.
Account Title Account Balance Amount Insured Amount Uninsured
Bill POD to Sue $ 100,000 $ 100,000 $ 0
Sue POD to Bill $ 100,000 $ 100,000 $ 0
Bill & Sue POD to 3 children $ 600,000 $ 600,000 $ 0
Total $ 800,000 $ 800,000 $ 0
These three accounts totaling $800,000 are fully insured because each owner is entitled to $100,000 of coverage for the interests of each qualifying beneficiary in the accounts. Bill has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – his wife in the first account and his three children in the third account). Sue also has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – her husband in the second account and her three children in the third account).
When calculating coverage for revocable trust accounts, be careful to avoid these common mistakes:
Do not assume that coverage is calculated as $100,000 times the number of people –owner(s) and beneficiary(ies) – named on a trust account. Coverage is provided for the interest of each qualifying beneficiary named by each owner. Additional coverage is not provided to the owners for naming themselves as owners. For example, a father's POD account naming two sons as equal beneficiaries is insured to $200,000 only -- $100,000 for the interest of each qualifying beneficiary.
Do not assume that the FDIC insures POD and living trust accounts separately. In applying the $100,000 per-beneficiary insurance limit, the FDIC combines an owner's POD accounts with the living trust accounts that name the same beneficiaries at the same bank.
For More Information from the FDIC
Call toll-free at:
1-877-ASK-FDIC (1-877-275-3342)
from 8 am until 8 pm (Eastern Time)
Monday through Friday
Hearing Impaired Line:
1-800-925-4618
Calculate your insurance coverage using the FDIC's online Electronic Deposit Insurance Estimator at: www2.fdic.gov/edie
Request a copy of "Your Insured Deposits: FDIC's Guide to Deposit Insurance Coverage," which provides a detailed description of the ownership categories, by calling toll free at: 1-877-275-3342
For downloadable, camera-ready files of "Your Insured Deposit" and "Insuring Your Deposit," visit " Reprintable FDIC Brochures" at www.fdic.gov, "About FDIC."
Read more about FDIC insurance online at: www.fdic.gov/deposit/deposits
Order FDIC deposit insurance products online at www2.fdic.gov/depositinsuranceregister
Send your questions by e-mail using the FDIC's online Customer Assistance Form at: www2.fdic.gov/starsmail
Mail your questions to:
Federal Deposit Insurance Corporation
Attn: Deposit Insurance Outreach
550 17th Street, NW
Washington, DC 20429-9990
information from SIPC - Securities Investor Protection Corporation
NASAA, SIPC OFFER ANSWERS TO INVESTORS CONCERNED ABOUT THE SAFETY OF THEIR BROKERAGE ACCOUNTS
(news release on www.sipc.org)
WASHINGTON, D.C. - March 25, 2008 – In the wake of recent turbulence in the financial markets, the North American Securities Administrators Association (NASAA) today joined with the Securities Investor Protection Corporation (SIPC), which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, to remind investors of the important and effective safeguards already in place to protect their brokerage account assets.
"In light of the recent financial impairment of a major Wall Street firm and the ongoing volatility in the U.S. securities markets, it is understandable that Main Street investors may have questions about the safety of assets in their brokerage accounts. NASAA and SIPC want to ensure that investors are well informed about their rights and protections under our nation's securities laws", said NASAA President and North Dakota Securities Commissioner Karen Tyler.
SIPC President Stephen Harbeck said: "When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers' cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court."
SIPC either acts as trustee or works with an independent court-appointed trustee in a brokerage insolvency case to recover funds. The statute that created SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities - such as stocks or bonds -- that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000. This figure includes a maximum of $100,000 on claims for cash.
Rules of the U.S. Securities and Exchange Commission require registered broker-dealers to maintain net capital to provide financial resources so that customers will get their cash and securities back if the firm fails. According to the SEC, customer claims for their funds and securities are senior to other claims on the broker-dealer.
In addition to the protections provided by SIPC and the SEC's net capital rule, the SEC requires registered broker-dealers to place client assets into accounts segregated from the brokers' own proprietary funds and securities. As a result, clients are protected from the firm's trading losses.
The phrases "MEMBER SECURITIES INVESTOR PROTECTION CORPORATION" or "Member SIPC" appear in all signs and ads of SIPC members. If you have a question as to whether or not a particular firm is a member of SIPC, call the SIPC Membership Department at (202) 371-8300 or visit SIPC on the Web at www.sipc.org.
For more information about SIPC, see "The Investor's Guide to Brokerage Firm Liquidations" at http://www.sipc.org/pdf/SIPC_brochure_Investors_Guide_To_BD_Liquidations.pdf.
NASAA also urges investors to contact their state or provincial securities regulator with any questions about an investment firm, professional or product.
NASAA is the oldest international organization devoted to investor protections. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the US Virgin Islands, the provinces and territories of Canada, and Mexico.
The Securities Investor Protection Corporation is the U.S. investor's first line of defense in the event a brokerage firm fails, owing customer cash and securities that are missing from customer accounts. From the time Congress created it in 1970 through December 2006, SIPC has advanced $505 million in order to make possible the recovery of $15.7 billion in assets for an estimated 626,000 investors.
(news release on www.sipc.org)
WASHINGTON, D.C. - March 25, 2008 – In the wake of recent turbulence in the financial markets, the North American Securities Administrators Association (NASAA) today joined with the Securities Investor Protection Corporation (SIPC), which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, to remind investors of the important and effective safeguards already in place to protect their brokerage account assets.
"In light of the recent financial impairment of a major Wall Street firm and the ongoing volatility in the U.S. securities markets, it is understandable that Main Street investors may have questions about the safety of assets in their brokerage accounts. NASAA and SIPC want to ensure that investors are well informed about their rights and protections under our nation's securities laws", said NASAA President and North Dakota Securities Commissioner Karen Tyler.
SIPC President Stephen Harbeck said: "When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers' cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court."
SIPC either acts as trustee or works with an independent court-appointed trustee in a brokerage insolvency case to recover funds. The statute that created SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities - such as stocks or bonds -- that are already registered in their names or in the process of being registered. At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000. This figure includes a maximum of $100,000 on claims for cash.
Rules of the U.S. Securities and Exchange Commission require registered broker-dealers to maintain net capital to provide financial resources so that customers will get their cash and securities back if the firm fails. According to the SEC, customer claims for their funds and securities are senior to other claims on the broker-dealer.
In addition to the protections provided by SIPC and the SEC's net capital rule, the SEC requires registered broker-dealers to place client assets into accounts segregated from the brokers' own proprietary funds and securities. As a result, clients are protected from the firm's trading losses.
The phrases "MEMBER SECURITIES INVESTOR PROTECTION CORPORATION" or "Member SIPC" appear in all signs and ads of SIPC members. If you have a question as to whether or not a particular firm is a member of SIPC, call the SIPC Membership Department at (202) 371-8300 or visit SIPC on the Web at www.sipc.org.
For more information about SIPC, see "The Investor's Guide to Brokerage Firm Liquidations" at http://www.sipc.org/pdf/SIPC_brochure_Investors_Guide_To_BD_Liquidations.pdf.
NASAA also urges investors to contact their state or provincial securities regulator with any questions about an investment firm, professional or product.
NASAA is the oldest international organization devoted to investor protections. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the US Virgin Islands, the provinces and territories of Canada, and Mexico.
The Securities Investor Protection Corporation is the U.S. investor's first line of defense in the event a brokerage firm fails, owing customer cash and securities that are missing from customer accounts. From the time Congress created it in 1970 through December 2006, SIPC has advanced $505 million in order to make possible the recovery of $15.7 billion in assets for an estimated 626,000 investors.
from Fox News New York - Lehman Bankruptcy
Judge Says Lehman Can Sell Units To Barclays
Last Edited: Saturday, 20 Sep 2008, 9:42 AM EDT
Created: Saturday, 20 Sep 2008, 9:42 AM EDT
Lehman specialist Elizabeth Rose smiles as she works at her post on the floor of the New York Stock Exchange, Friday Sept. 19, 2008. Wall Street extended a huge rally Friday as investors stormed back into the market, relieved that the government plans to restore calm to the financial system by rescuing banks from billions of dollars in bad debt. (AP Photo/Richard Drew) By VINNEE TONG
AP Business Writer
NEW YORK -- A bankruptcy judge approved a plan just after midnight Saturday under which Lehman Brothers will sell its investment banking and trading businesses to Barclays.
The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman's Midtown Manhattan office tower.
Lehman filed the biggest bankruptcy in U.S. history Monday, after Barclays declined to buy the investment bank in its entirety.
The British bank will take control of Lehman units that employ about 9,000 employees in the U.S.
"Not only is the sale a good match economically, but it will save the jobs of thousands of employees," Lehman lawyer Harvey Miller of Weil, Gotshal & Manges said.
Barclays took on a potential liability of $2.5 billion to be paid as severance, in case it decides not to keep certain Lehman employees beyond the guaranteed 90 days. But observers have said Barclays' main reason for acquiring Lehman is to get its people and presence in North America, making widespread layoffs less likely.
"It's unimaginable to me that they can run the business without people," said Lehman's financial adviser, Barry Ridings, of Lazard Ltd.
Barclays had little competition to land the deal.
Miller said that before it filed for bankruptcy, Lehman had negotiated with just one other bidder, Bank of America Corp. BofA instead announced Monday that it would buy Merrill Lynch & Co., saving it from a fate similar to Lehman's. That deal was originally valued at $50 billion.
Miller said that since Lehman filed for bankruptcy, Barclays had been the only buyer to express interest in acquiring even parts of the 158-year-old investment bank.
Lehman lawyers announced a number of changes to the deal before the hearing, which started at 4:30 p.m. Friday and continued well past midnight Saturday.
Lehman lawyers said the value of stock Barclays will buy and liabilities it will assume has fallen since the start of the week due to market volatility. Under the new deal, Barclays will buy $47.4 billion in securities and assume $45.5 billion in liabilities.
Barclays also said it would buy three additional units -- Lehman Brothers Canada Inc., Argentina-based Lehman Brothers Sudamerica SA and Lehman Brothers Uruguay SA. The two South American entities are part of Lehman's money management business. Barclays is not paying extra to get the three units.
There was no change to a $250 million goodwill payment and the purchase of two data centers in New Jersey that will go to Barclays, although Barclays may pay less for them. Lehman's investment management business Neuberger Berman was not bought by Barclays.
The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts -- about 130,000 of which are owned by individual investors -- to Barclays accounts.
"The substance of this transaction is to continue a business for the benefit of the economy," Lehman lawyer Miller said in court.
The hearing drew more than 200 lawyers and observers, who spilled into overflow rooms on two floors of the U.S. Bankruptcy Court in Lower Manhattan.
In response to the extraordinary events of the week, the Bush administration announced Friday the biggest proposed government intervention in financial markets since the Great Depression. Some are calling it an "RTC-style bailout" in reference to the government-owned Resolution Trust Corp. that wound down the assets of Savings and Loan Associations, mostly in the 1980s.
"Somehow Lehman Brothers gets left on the sidelines," said Daniel Golden of Akin Gump Strauss Hauer & Feld LLP, who represents clients holding about $9 billion in bonds. "We believe this was a flawed sales process. It benefits Barclays and the federal government but not the creditors of this estate.
"The economic landscape seems to have changed over the last two days," he said. "Yet the debtors and the Fed seem determined that nothing get in the way of this transaction."
Had Lehman filed for Chapter 11 a week later than it had, its fate may have been different.
"This is a tragedy -- maybe we missed the RTC by a week," Miller said.
"That occurred to me, as well," the judge in the case, James Peck, said. "Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets."
www.myfoxny.com
Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Last Edited: Saturday, 20 Sep 2008, 9:42 AM EDT
Created: Saturday, 20 Sep 2008, 9:42 AM EDT
Lehman specialist Elizabeth Rose smiles as she works at her post on the floor of the New York Stock Exchange, Friday Sept. 19, 2008. Wall Street extended a huge rally Friday as investors stormed back into the market, relieved that the government plans to restore calm to the financial system by rescuing banks from billions of dollars in bad debt. (AP Photo/Richard Drew) By VINNEE TONG
AP Business Writer
NEW YORK -- A bankruptcy judge approved a plan just after midnight Saturday under which Lehman Brothers will sell its investment banking and trading businesses to Barclays.
The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman's Midtown Manhattan office tower.
Lehman filed the biggest bankruptcy in U.S. history Monday, after Barclays declined to buy the investment bank in its entirety.
The British bank will take control of Lehman units that employ about 9,000 employees in the U.S.
"Not only is the sale a good match economically, but it will save the jobs of thousands of employees," Lehman lawyer Harvey Miller of Weil, Gotshal & Manges said.
Barclays took on a potential liability of $2.5 billion to be paid as severance, in case it decides not to keep certain Lehman employees beyond the guaranteed 90 days. But observers have said Barclays' main reason for acquiring Lehman is to get its people and presence in North America, making widespread layoffs less likely.
"It's unimaginable to me that they can run the business without people," said Lehman's financial adviser, Barry Ridings, of Lazard Ltd.
Barclays had little competition to land the deal.
Miller said that before it filed for bankruptcy, Lehman had negotiated with just one other bidder, Bank of America Corp. BofA instead announced Monday that it would buy Merrill Lynch & Co., saving it from a fate similar to Lehman's. That deal was originally valued at $50 billion.
Miller said that since Lehman filed for bankruptcy, Barclays had been the only buyer to express interest in acquiring even parts of the 158-year-old investment bank.
Lehman lawyers announced a number of changes to the deal before the hearing, which started at 4:30 p.m. Friday and continued well past midnight Saturday.
Lehman lawyers said the value of stock Barclays will buy and liabilities it will assume has fallen since the start of the week due to market volatility. Under the new deal, Barclays will buy $47.4 billion in securities and assume $45.5 billion in liabilities.
Barclays also said it would buy three additional units -- Lehman Brothers Canada Inc., Argentina-based Lehman Brothers Sudamerica SA and Lehman Brothers Uruguay SA. The two South American entities are part of Lehman's money management business. Barclays is not paying extra to get the three units.
There was no change to a $250 million goodwill payment and the purchase of two data centers in New Jersey that will go to Barclays, although Barclays may pay less for them. Lehman's investment management business Neuberger Berman was not bought by Barclays.
The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts -- about 130,000 of which are owned by individual investors -- to Barclays accounts.
"The substance of this transaction is to continue a business for the benefit of the economy," Lehman lawyer Miller said in court.
The hearing drew more than 200 lawyers and observers, who spilled into overflow rooms on two floors of the U.S. Bankruptcy Court in Lower Manhattan.
In response to the extraordinary events of the week, the Bush administration announced Friday the biggest proposed government intervention in financial markets since the Great Depression. Some are calling it an "RTC-style bailout" in reference to the government-owned Resolution Trust Corp. that wound down the assets of Savings and Loan Associations, mostly in the 1980s.
"Somehow Lehman Brothers gets left on the sidelines," said Daniel Golden of Akin Gump Strauss Hauer & Feld LLP, who represents clients holding about $9 billion in bonds. "We believe this was a flawed sales process. It benefits Barclays and the federal government but not the creditors of this estate.
"The economic landscape seems to have changed over the last two days," he said. "Yet the debtors and the Fed seem determined that nothing get in the way of this transaction."
Had Lehman filed for Chapter 11 a week later than it had, its fate may have been different.
"This is a tragedy -- maybe we missed the RTC by a week," Miller said.
"That occurred to me, as well," the judge in the case, James Peck, said. "Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets."
www.myfoxny.com
Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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