By Ted Howard
The end of the FDIC’s Transaction Account Guarantee means there could be lots of cash surging into the market. Where should treasurers put their company’s money?
TAG, you’re not it anymore. As many expect, the Transaction Account Guarantee (TAG) program will end as scheduled on December 31, 2012.
TAG, of course, is the emergency program put into place by the Federal Deposit Insurance Corp. amid the heat of the 2008 financial crisis. It insured deposits over the usual $250,000; whether it was $5mn or $5bn, the Feds guaranteed it. Estimates put the total of TAG at about $1.6 tn, or 13 percent of all bank deposits.
But that is certain to change at the end of December. Given the current environment of covering all risk all the time, it is expected that many companies might think about moving their cash elsewhere. And when the end does come in a few short weeks, there are options.
Bank ratings
One of the reasons many companies will likely choose to relocate their cash deposits to more secure locations is because many of the banks have been downgraded since the crisis. According to institutional investment advisor Capital Advisors Group, most of the deposits are with the 20 largest banks—banks that have emerged from the financial crisis with much weaker credit profiles (although still considered healthy in many respects). And the only reason they still attracted the funds in the first place was because of TAG. So when it’s over, it’s doubtful the money will stay.
So where will it go? There are several options. Capital Advisors Group lists at least three below. But there are other options, including a new product from investment manager and community bank advisor StoneCastle Cash Management.
Should I stay or should I go?
In a recent white paper, Capital Advisors outlined three strategies for treasurers once the TAG program ends. These include staying with the deposits, asset pools, and direct purchases.
1. Deposits. Capital Advisors acknowledges that most institutions likely will have way more than $250,000 in their bank deposits. Nonetheless, the company suggests not rushing for the exits on January 1. Instead, it recommends careful study when deciding where and how much to place in uninsured deposits. “Treasury managers should carefully evaluate the standalone credit strength of their banks and adjust their relationships accordingly,” Capital Advisors wrote. “Remember that size no longer implies safety in the post-financial crisis world.”
Also, institutional depositors should consider “further diversifying their deposits among more credit worthy banks to reduce credit concentration risk.”
Capital Advisors also suggests that cash managers consider moving a portion of their uninsured deposits to certificates of deposits and savings accounts to better capture yield opportunities. This option of course crimps liquidity but does add safety if the cash isn’t needed right away.
2. Asset Pools. Capital Advisors writes that compared to uninsured deposits at individual banks, regulated assets pools—like money market funds—can offer the advantage of “instant risk diversification.” Despite the worries over MMF regulation, recent moves at the Securities and Exchange Commission, i.e., the coming departure of Chairman Mary Schapiro, likely will push any decision out well into 2013 if not beyond. With that in mind, MMFs “continue to be logical alternatives to deposits,” Capital Advisors writes, what with funds being managed to maintain the infamous $1.00 net asset value; they also provide daily cash availability. Other regulated asset pools can include
ultra-short-term bond mutual funds, bank short-term investment funds, local government investment pools and ETFs.
There is risk to these assets of course. Due to their shared nature, “pooled investments” means that investors also share the downside risk, “chief among which is shared liquidity, or the lack thereof, during market disruptions,” Capital Advisors writes. Also, transparency could be limited in these investments. Investors will also need to keep an eye on Washington to see how the battle of MMF regulation plays out.
3. Direct Purchases. Capital Advisors finally suggests as a third option for the end of TAG direct purchases of high quality and liquid securities—either by internal staff (if one has the depth) or, more realistically, through a separately managed account (SMA) manager. “SMA managers may help treasury professionals diversify their credit exposures, manage their liquidity needs and deliver yield objectives consistent with their risk tolerance,” Capital Advisors writes.
Yet another alternative
With the end of TAG looming banks and others have been busy developing new and innovative products for institutional investors to explore. One product that sounds promising is StoneCastle Cash Management’s Federally Insured Cash Account (FICA®). FICA, not to be confused with the more familiar Federal Insurance Contributions Act tax, is a cash management program offering weekly liquidity, a competitive yield and perhaps most importantly, a high level of FDIC insurance.
“TAG has been a very convenient vehicle,” says Josh Siegel, chairman of StoneCastle Cash Management, LLC. “It’s by definition not marked-to-market; there’s no time you go to the bank and have to haggle on value to get your dollar back. It is the ultimate in stable NAV.”
But now that TAG is going away, Mr. Siegel says, treasurers will be scrambling to put cash in a safe place. They could go into treasuries, he said, and with the full faith and credit of the US government, they’re safe. The problem is there is almost no yield. Treasurers could also go to MMFs, but some may decide there is too much uncertainty (regardless of how far away the changes may be).
Treasurers could also decide to go into treasury money market funds; however, says Mr. Siegel, the surge in cash could push down yields and consequently, force fund managers to turn away new investment.
Enter StoneCastle’s FICA product. The idea is fairly simple: chop up a company’s single deposit into in $250,000 increments or less and deposit it at hundreds of community banks around the country, thereby getting the federal insurance.
StoneCastle uses US Bank as the custodian bank, which does the chopping and distributing. And while it may seem daunting to track hundreds of bank accounts, it all can be done via one online interface. “It’s always available in an overnight deposit account,” Mr. Siegel says. “They have realtime access to see every bank and every balance at every bank; and their accrued interest.”
The only limitation to consider is that it is weekly liquidity vs. daily. It is for those who want more stable funding vs. hot money for payroll and the like. Investors can withdraw on Mondays although they can deposit any day of the week. This, says Mr. Siegel, was mostly what banks wanted.
Companies can deposit up to $25mn per tax ID, which means companies with multiple operating entities—and separate tax IDs—could deposit much more.
“It effectively becomes one giant bank account” that is completely FDIC-insured, Mr. Siegel says.
So with TAG ending and possibly a virtual tsunami of cash threatening to hit the market, financial companies will continue to innovate to absorb that cash. While it’s good for their own businesses, it’s also good for the overall economy as such a surge in cash, if that were to happen, could have destabilizing effect on banks and markets as interest rates plunge.