|
PureBytes Links
Trading Reference Links
|
A reply to my original message attempted to place the responsibility for
Schwab's closing of their government money funds on the fact that
Schwab now owns a bank. They do, but that scenario is a totally
different, but equally sordid, story.
My original note related to one thing only, the closing of their
government securities money funds, and has absolutely no relevance to
sweep funds which are generally used to temporarily invest free cash
balances.
Like many others brokerages they have always had a series of money
funds, many of which have higher risk profiles in order to offer
enhanced rates of returns beyond those of governments.
Given the credit crunch, those higher risk profiles have become, for
many investors, more risk than they are willing to expose themselves to,
and they have therefore decided to opt for quality rather than rate --
and that means government or treasury securities.
For those of us who have been around long enough to have gone through
the last big credit crunch we can recall when money funds were only able
to maintain their $1.00 constant value by having their sponsors buy
depressed value securities from the fund at their original purchase
values. Given the current credit environment there is now a much
greater possible exposure to possible money funds losses on some of
their holdings, especially commercial paper, where the markets are at
best slow, and in some cases totally illiquid.
By closing the governments and treasury funds their customers have no
ability to opt for safety, and I don't blame anyone who would make such
a choice. To do otherwise is to rely on Schwab's willingness and
generosity to make fund investors whole as some, but not all, did the
last time money fund holdings suffered losses.
The sweep situation at Schwab is a totally different story, but equally
sordid.
Not too long ago you were able to choose one of their money funds to
invest free cash balances that were not currently needed for direct
investments. Now your only choice is a bank money fund (with the Schwab
Bank of course) which pays bank money fund rates -- rates which are
substantially below that of regular money funds -- and then they, in
addition, charge you 50 basis points for sweeping.
What a great way to assure the bank of a great source of the cheapest
money available while still earning the equivalent of a substantial
"management" fee that they previously got at the fund level. They
haven't been able to do that on qualified retirement fund accounts for
that would be a violation of ERISA's self dealing prohibitions. Nice
deal eh? What in one case is prohibited as undesirable and illegal
applies everywhere else.
If you bitch hard enough and let them know you understand they have been
known to make changes, but if they now have quality problems in some of
the money fund portfolios that may not be possible.
The Funkhousers wrote:
In reviewing some of my youngest son's investment accounts I find that
Schwab has closed both their Government and Treasury money funds to
investors not currently invested in them.
What a great testimony to the client orientation of that particular firm.
There is a real credit crunch that is occurring across the board, but
for those who really want to accept the below normal rates of
governments as a trade off for risk, that option should be available.
I have no idea how much, if any, of the suspect securities are held in
any of the other Schwab money funds, but the only advantage I can see
for their action is to make sure that those non governmental funds have
some improved inflow of cash to meet redemption requests.
Any one with a better idea of why, and is your broker doing the same?
Richard Funkhouser
|