RESCUING THE S&Ls; : A Primer : Savers Have Several Options on Where to Place Their Money
What alternatives are there to bank or savings and loan deposits? What should savers do with their money?
Although President Bush’s plan to bail out the nation’s savings and loans preserves the integrity of the federal deposit insurance system, depositors are nonetheless concerned about the safety of their institutions and the investment alternatives.
Here is a primer to help answer various questions about the options:
Question: How will the Bush proposal affect my bank or S&L; accounts?
Answer: The plan imposes higher insurance premiums on banks and S&Ls;, which may pass those higher costs along to consumers in the form of lower interest rates on savings accounts or higher charges on such things as checking accounts, canceled checks, or use of automatic tellers. More likely, however, institutions may charge higher rates on loans.
Fortunately, the plan preserves federal deposit insurance coverage. That protects accounts up to $100,000 per depositor at each institution. So if you have two accounts in your name at the same institution, you must add up the totals and make sure they don’t exceed $100,000 to be fully insured.
Q: Is there any reason to withdraw money from a bank or S&L; because of the Bush plan?
A: Generally not because of safety reasons. If you are under the federal deposit insurance limit, your money is safe and you will get all of it back--barring a collapse of the U.S. government.
However, the plan could increase the possibility that some S&Ls; will be declared insolvent and closed. Some 350 of the most troubled will be closed.
If that happens to your institution and you are fully insured, you will get all your money back, although some experts say you could face a potential hassle of waiting a few days to get it.
Q: What are common alternatives to bank deposits for conservative investors?
A: The most common alternatives include U.S. Treasury securities, money market mutual funds, mutual funds investing in short-term bonds and savings bonds. The safest are U.S. Treasury securities, which range in maturity from three months to 30 years. They are backed by the full faith and credit of the U.S. government and can be sold before maturity. They also are exempt from state and local taxes.
Series EE savings bonds also are backed by the U.S. government and are not taxed until they mature after about 12 years, or are redeemed. They also are exempt from state and local taxes and, starting in 1990, they may be exempt from federal taxes under certain circumstances if used to fund college educations.
Money market mutual funds are somewhat less safe than Treasuries and savings bonds because they are not backed by Uncle Sam. But they are still considered very secure; no one has ever lost a penny in them. They pool investors’ money and invest in Treasuries, bank certificates of deposit, corporate IOUs called commercial paper, and other short-term instruments. The safest are those that invest solely in Treasury securities.
Other alternatives include Ginnie Mae certificates, zero-coupon bonds (often a modified Treasury security) and municipal bonds.
Q: Are these alternatives more attractive than bank and S&L; accounts?
A: In many cases, they are. The average yield on money market mutual funds nationally is 8.76%, while three-month Treasury bills yield about 8.88% and one-year Treasury bills yield about 9.05%.
In contrast, the average yield on bank money market deposit accounts nationally is only 6.33%, while one-year bank CDs yield an average 8.63%, according to Bank Rate Monitor, a North Palm Beach, Fla., service that tracks rates.
With such differences, many investors have been shifting out of CDs into money market mutual funds or Treasuries.
But averages tell only part of the story. Individual money market funds and banks offer far higher or lower rates than the averages. For example, the average rate on one-year CDs sold through stock brokerage firms is 9.2%, while the biggest New York banks are paying an average of 9.18%, according to Banxquote Money Market, a New York information service. But the three largest California banks only pay 7.9% on average, Banxquote says. The point is, better yields on all investments can be found by shopping around.
Q: How can I buy Treasuries?
A: Treasury bills, with maturities between three months and one year, can be purchased through Federal Reserve banks or, for a fee, through banks and brokers. But they are a hassle to buy through the Fed banks, involving a complex bidding process. And they also require a $10,000 minimum investment, with additional purchases in $5,000 increments. Treasury notes, with maturities between two and 10 years, and Treasury bonds, which mature in 10 to 30 years, can be bought for smaller amounts.
The Fed’s Los Angeles branch provides a recorded message with more information on how to buy Treasury bills, notes and bonds. Call it at 213-688-0068. Further assistance regarding Treasuries can be obtained through 213-624-7398. And information on this week’s Treasury bill rates and upcoming offerings can be obtained through 213-688-0069.
Q: How can I buy money market mutual funds?
A: These generally require minimum initial investments of $1,000, although some require as little as $100, which you will typically invest in by sending a check through the mail. Call the funds you are interested in for information and application forms.
Listings of mutual funds can be obtained from various services. One of the most complete and least expensive is available for $2.50 through the Investment Company Institute, 1600 M St. N.W., Washington, D.C. 20036.
