Investment Insights

Jeff Benjamin

Cash management that could crush money markets

Strategy of spreading balances among FDIC-guaranteed banks yields sixfold annual gains

Jun 5, 2011 @ 12:01 am

Unless a 5-basis-point yield somehow sounds like a good deal, it might be time to start looking beyond the basic money market mutual fund. Whether it is a matter of yield or security, the market has stepped up with a variation on cash management that should gain growing appeal within the financial planning community and at the same time put another chink in the armor of money market funds.

Along the lines of “necessity is the mother of invention,” StoneCastle Partners LLC has emerged as one of the leading innovators in the cash management arena.

The basic idea, which is actually more of a technology solution than it is an asset management strategy, is to spread large cash balances across multiple regional and community banks.

In doing so, StoneCastle is able to offer Federal Deposit Insurance Corp. guarantees on multimillion-dollar accounts. This is a far cry from the $250,000 FDIC insurance that investors get by going directly to a bank.

What's more, the annual yield on these fully liquid accounts is hovering above 30 basis points, or about six times what investors are getting from non-FDIC-insured money market mutual funds.

The key component here is basic supply and demand.

Companies such as StoneCastle and Fairchild U.S. LLC are bringing large cash balances to where they are needed most: thousands of small community and regional banks.


Many of these banks are so hungry for deposits, which they need in order to make loans, that they are willing to pay interest rates to intermediary firms of as high as 44 basis points.

For the banks, the money is deposited in $250,000 increments from multiple accounts, but for institutions and wealthy individuals, the aggregation can manage up to $20 million per tax identification number.

The participating banks have assets of between $500 million and $10 billion, which compares with more than $1 trillion for a large money center bank such as Bank of America Corp.

And as more community and regional banks get involved, the FDIC coverage could grow to about $50 million per account by the end of the year, according to Mark Kelley, Fairchild's managing partner.

“These banks are seeking deposit relationships,” he said. “We're matching up the needs of the banks with the institutions and other investors that want to offload some cash.”


The general trend toward spreading large cash balances across multiple FDIC-insured banks is fueled in part by a “trifecta of issues facing money market funds,” according to Eric Lansky, StoneCastle's managing director.

Those three big issues are historic low yields, more-stringent ratings on both the funds and the companies sponsoring the funds, and a regulatory push toward letting the net asset value of money market funds float.

The money market mutual fund industry, represented by the Investment Company Institute, isn't a fan of a floating net asset value, largely because it is considered bad for business.

Institutional investors, which now represent 70% of the $3 trillion in money fund assets, prefer a stable NAV, as do retail investors because it offers the appearance of security.

The tipping point for money market mutual funds, which opened the door for FDIC-insured alternatives, came in September 2008 when the Reserve Primary Fund's NAV broke the buck, falling below $1 due to investments in bonds from failing Lehman Brothers Holdings Inc.

“People have been complacent with money market funds, but I think that complacency is going away,” Mr. Lansky said. “When people go to cash, they really don't want to take risks, yet a lot of people still assume money market funds are insured and regulated just like a bank.”

Questions, observations, stock tips? E-mail Jeff Benjamin at


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