How Does a Money Market Account Work?
 

I understand there is a bit more risk than standard savings accounts...why?

Also, how do these companies make money on the deposits while protecting against the short term need for withdrawals etc ?

Using ING and Emigrant as examples, how much do these companies figure to profit on deposits if they are giving out 3.75-4%?

Who manages one of these? Is that a job title?


Any and all input appreciated.

Re: How Does a Money Market Account Work?
 

A money market account is simply a mutual fund that is invested in short-term debt instruments. Just looking at JPMorgan’s Prime Money Market Fund (annual report happened to be laying around the office – I don’t work there and this is not an endorsement), its holding consists of:

1% - Asset Banked Securities
27% - Corp. Bonds
1% - Funding Agreements
3% - Gov’t Agency Securities
20% - CDs
24% Commercial Paper
19% Repos
5% Time Deposits

The yield that you get is a function of what the fund is invested in less an expense fee. This report is dated 8/31/05 and the fund yielded 3.22%. Because these are usually so large (this one $74 B) fees are usually low, about .5% in this case.

They are considered more risky because they have default risk, although it is minimized by the short-term nature of the securities held. I think there has only been one fund that has “broken a buck” but the mgmt company might have reimbursed the fund. I’ll check on that.

In order to handle withdrawals, the securities are liquid and the average maturity is very short, 44 days for the above fund.

These funds are managed by a fund manager usually there is a group of managers that manage several at a time. The annual report for the JPMorgan fund was for 6 total funds. The others are for specialized needs.

Federal Money Market – safer than the regular as it only invests in federal agency paper.
100% US Treasury – even safer than the Federal above.
Tax Free
California Municipal
New York Municipal

Re: How Does a Money Market Account Work?
 

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I understand there is a bit more risk than standard savings accounts...why?

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Money market accounts invest in very short term paper... there is a very small risk, but it is not secured, thus disclaimers.

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Also, how do these companies make money on the deposits while protecting against the short term need for withdrawals etc ?

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Money Market accounts protect against withdrawal risk by being aware of their "normal" withdrawal related needs and timing their transactions so they are able to cover any needs. Also they usually have a line of credit to draw on in "unusual" circumstances.

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Using ING and Emigrant as examples, how much do these companies figure to profit on deposits if they are giving out 3.75-4%?

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These banks are usually taking your money on deposit and loaning it out to others. That is how they make their profit!

Re: How Does a Money Market Account Work?
 

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Money market accounts invest in very short term paper... there is a very small risk, but it is not secured, thus disclaimers.

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I think the original poster is referring to the bank vehicle called "money markets" that are just a savings account with a different name. For example, the ING Orange account is still FDIC insured and have no risk. (As opposed to a money market mutual fund)

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Using ING and Emigrant as examples, how much do these companies figure to profit on deposits if they are giving out 3.75-4%?

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These guys rely more on volumn and very low overhead as they are operating at a much smaller interest margin as a typical bank.

Still regardless the average loan earns slightly over 6% when factoring in default risk.

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Also, how do these companies make money on the deposits while protecting against the short term need for withdrawals etc ?

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Banks do extensive analysis with asset liablity management. These include lots of "what-ifs" scenerios and how it will effect liquidity, profits, and capital ratios.

Here is a very basic description.

http://www.riskglossary.com/link/ass...management.htm

Re: How Does a Money Market Account Work?
 

[ QUOTE ]

I think the original poster is referring to the bank vehicle called "money markets" that are just a savings account with a different name. For example, the ING Orange account is still FDIC insured and have no risk. (As opposed to a money market mutual fund)

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this is what i meant, yes

Re: How Does a Money Market Account Work?
 

ING invests mostly in mortgage-backed securities and a little in mortgage loans.

ING has an operating expense ratio of only 0.12% while most traditional banks are between 2.50%-3.50%.

You can search through their call report for more info if it interests you.

http://www2.fdic.gov/Call_TFR_Rpts/tocca...+++++++++++++++

Re: How Does a Money Market Account Work?
 

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ING has an operating expense ratio of only 0.12%

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My bad... that was only one quarter worth of expenses, so their expense ratio is a hair under 0.50%.

Re: How Does a Money Market Account Work?
 

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ING invests mostly in mortgage-backed securities and a little in mortgage loans.

ING has an operating expense ratio of only 0.12% while most traditional banks are between 2.50%-3.50%.

You can search through their call report for more info if it interests you.

http://www2.fdic.gov/Call_TFR_Rpts/tocca...+++++++++++++++

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theoretically, they could invest in anything they wanted though right? if they saw fit, they could pull all of that out tomorrow and put it in tomato futures?


As a side note, just found out PayPal has a Money Market account...4.13%, a tad over Emmigrant

Re: How Does a Money Market Account Work?
 

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theoretically, they could invest in anything they wanted though right? if they saw fit, they could pull all of that out tomorrow and put it in tomato futures?

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Not all, the FDIC would not go for that. They have requirements that you may have only a certain percantage of their capital (retained earnings mostly) in "risk based assets".

Re: How Does a Money Market Account Work?
 

Degen, don't take this as a personal attack, 'cause it's not. This is more a general comment on the board...it seems like there's quite a few people here who are "playing at limits above their bankroll," to use a poker analogy. Be careful with your money.
Anyway....here are the two comments from Degen over the last few weeks that prompted this:
[ QUOTE ]
How Does a Money Market Account Work? .... how much do these companies figure to profit on deposits if they are giving out 3.75-4%?

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100% GOOG

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Re: How Does a Money Market Account Work?
 

[ QUOTE ]
Degen, don't take this as a personal attack, 'cause it's not. This is more a general comment on the board...it seems like there's quite a few people here who are "playing at limits above their bankroll," to use a poker analogy. Be careful with your money.
Anyway....here are the two comments from Degen over the last few weeks that prompted this:
[ QUOTE ]
How Does a Money Market Account Work? .... how much do these companies figure to profit on deposits if they are giving out 3.75-4%?

[/ QUOTE ]
[ QUOTE ]
100% GOOG

[/ QUOTE ]

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hehe check out snipers post today on my latest blog entry...

i've since jammed my tail like ALL THE WAY between my legs


o and, why does that first one make it seem like i'm playing over my head?

Re: How Does a Money Market Account Work?
 

It wasn't the first one by itself, it was the two together. (It struck me as someone without a basic understanding of the financial markets putting all his eggs into one highly volatile basket.)
I hadn't read Snipe's thing yet but I'll go do that now.

Re: How Does a Money Market Account Work?
 

Degen,

On the off chance that this was a "business" rather than personal inquiry...

The easiest way to learn how these funds operate is to read a perspectus... they pretty much detail exactly what they do.

Re: How Does a Money Market Account Work?
 

Most of the money markets discussed on this board are Money Market Deposit Accounts (MMDA's) and are fully insured to $100,000 and carry zero risk.

These deposit accounts have nothing to do the stock/bond markets, but do have a similar confusing name.

Here is a quick synopsis:


Two products that are easy to confuse because they have similar names are Money Market Deposit Accounts and money market mutual funds (often called money market funds). MMDAs, as we described previously and as the name indicates, are deposits and, as a result, are covered by FDIC insurance. Money market mutual funds, on the other hand, are funds that invest primarily in short-term corporate bonds or government securities and are not deposit accounts insured by the FDIC.

To minimize potential confusion about which products are FDIC-insured, banks and savings institutions are required by federal banking regulators to clearly differentiate insured deposits from investments, both in their sales practices and their advertisements. For example, to the extent possible, investment sales should not take place in a bank's teller area. Institutions also must ensure that sales personnel are properly qualified and trained, and that they recommend investments that are suitable for each customer. In addition, when offering or advertising an investment product to a customer, FDIC-insured institutions must indicate that the investment:


Is not FDIC-insured;


Is not guaranteed by the bank or savings institution; and


Is subject to investment risk, including the possible loss of principal.

Re: How Does a Money Market Account Work?
 

so the ING/Emmigrant accounts are of the deposit variety, and so is PayPal's...and these are offering 3.75%+ with zero risk? why on earth would somebody put their money in an account giving less then? my bank is giving less than 1% on my savings account...

thx a lot Uglyowl, do you or anybody else know if there are off shore-varities of these accounts? obviously they wouldn't be FDIC insured but hopefully they could carry some other assurance and get the risk as close to 0 as possible...

Re: How Does a Money Market Account Work?
 

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3.75%+ with zero risk? why on earth would somebody put their money in an account giving less then?

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Recently I sent an email to about two dozen friends and family members telling them about the ING savings account. If they signed up, they would have gotten a bonus of $x (I forget what) and I would have gotten $25. How many of these people (who know and trust and love me) took the time to sign up for this obviously-more-beneficial-than-what-they-have-now account? One.
The average American never ceases to amaze me with his level of cluelessness and inertia in regard to finances.

Re: How Does a Money Market Account Work?
 

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The average American never ceases to amaze me with his level of cluelessness and inertia in regard to finances.

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The inertia is overwhelming at times. My wife had to basically shake me a couple times before I was willing to open an ING account. Now I use the account heavily, storing my tax money there before I have to send it to Uncle Sam. But early in the year, I overpayed my estimated payments by $16k to avoid having to open a savings account to keep the money in. Dumb dumb. I lost about 16k*(0.03) = $480 just by being pigheaded.

There's probably a slightly better place to keep my Uncle Sam money, but I'm too lazy to try to find it. [img]/images/graemlins/tongue.gif[/img]

Re: How Does a Money Market Account Work?
 

[ QUOTE ]
[ QUOTE ]
3.75%+ with zero risk? why on earth would somebody put their money in an account giving less then?

[/ QUOTE ]
Recently I sent an email to about two dozen friends and family members telling them about the ING savings account. If they signed up, they would have gotten a bonus of $x (I forget what) and I would have gotten $25. How many of these people (who know and trust and love me) took the time to sign up for this obviously-more-beneficial-than-what-they-have-now account? One.
The average American never ceases to amaze me with his level of cluelessness and inertia in regard to finances.

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I've had the exact same experience. You basically have to march up to your family's computers and sign them up yourself. It's rediculous.

Krishan

Re: How Does a Money Market Account Work?
 

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so the ING/Emmigrant accounts are of the deposit variety, and so is PayPal's

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Emigrant and ING are deposit FDIC insured accounts. Paypal is a MM mutual fund.

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The average American never ceases to amaze me with his level of cluelessness and inertia in regard to finances.



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So, so true. Bank of America is offering 0.55% on their savings which is typical for your large B&M bank. Yet these guys continue to thrive on the backs of "stupid people".

There are now CD specials running you will not find on bankrate.com as they are for unusual terms (i.e. 16 months) that do not fit into their search. A few institutions are offering 5.0% CD specials and should be fairly common soon. Some banks are trying to hit there 2005 deposit goals and are offering great rates now.

Re: How Does a Money Market Account Work?
 

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Bank of America is offering 0.55% on their savings

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And check out their CD rates as compared to most of the others (I think you can get this type of stuff on bankrate.com). BAC mgmt. won't admit this publicly, but it's as plain as the nose on your face: they have actually adopted the strategy of NOT attracting these types of assests. They're actually TRYING to repel new customers (and "entice" their current customers to leave), and yet the inertia of the system is still keeping those assets there.

(If you're interested in a more in-depth analysis of BAC, this strategy, etc., see Tom Brown's writings on bankstocks.com.)