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Market Comment


Welcome to the inaugural edition of the BBE Community Investment Partners, LLC Market Comment. In these monthly commentaries our desire is to provide useful and timely information to our readers to keep their investments Safe, Liquid and earning a competitive Return.

It is nearly impossible today to open a newspaper, watch television or view any on-line news source without reading or hearing about the turmoil in the financial markets brought on by the collapse of the sub-prime mortgage market. Financial markets and the banking system have not been under such stress since the unraveling of the savings and loan industry in the 1980’s. Banks have written off billions (that’s with a B) as they revalue mortgage-backed securities held in their portfolios.

In an effort to stave off a recession the Federal Reserve Bank has slashed the target Fed Funds rate, the rate banks charge each other for short-term loans, 6 times since September 2007. An unexpected development has been bank’s unwillingness to lend to each other for fear of borrowers exposure to sub-prime mortgages. Despite the Feds best efforts to add liquidity to the banking system, a “credit crunch” has developed with lenders becoming extremely cautious in all situations, not simply mortgages. And little can be added here to emphasize the seriousness of the situation when Bear Stearns, the 5th largest investment bank, was purchased (with assistance from the Federal Reserve Bank) by JP Morgan Chase Bank for $2.00 per share (later increased to $10.00 per share) to forestall a bankruptcy filing by Bear Stearns.

For fixed income investors, especially short-term investors, this has translated into a rapid decline in interest earnings. The Wisconsin LGIP declined from 5.21% in July, 2007 to 3.12% in March, 2008. An investor with $1,000,000 in the LGIP in July, 2007 earned $4,424.93 and in March, 2008 that same $1,000,000 earned $2,642.62, a decline in interesting earnings of over 40%.

Now we know what has happened. What should municipal investors do today to limit their risks in these volatile times and still earn a competitive return? Fortunately state statutes offer guidance by allowing only low risk, high credit quality fixed income investments. Still municipalities should take additional precautious.


  1. Decrease custodial credit risk.

    2. • As much as possible increase FDIC coverage by spreading deposits among financial institutions.
    • Secure high quality collateral for deposits that exceed FDIC insurance limits.
    • Monitor your financial institutions closely. Request and review your depository banks financial statements.

  2. If you don’t have one, develop an annual cash flow forecast.

    3. • Interest rates will probably decline further. Knowing your liquidity requirements for the foreseeable future will allow you to take advantage of appropriate investment opportunities.

  3. Review your investment strategy.

    4. • As stated earlier, interest rates will probably decline further. Some certificate of deposit yields are attractive, especially for maturities 90 days to one year. If your liquidity situation allows consider re-allocating funds from short-term money market type accounts.

In these times of market volatility and financial uncertainty it is incumbent for municipal investors and public depositors to remain diligent in an effort to keep their cash assets safe. If you have questions on developing a cash flow forecast or need help in reviewing your investment strategy contact Ken Herdeman at BBE Community Investment Partners, LLC, 262-796-6164 or kherdeman@bankersbankusa.com.


FDIC Considers Increasing Deposit Insurance Coverage for Municipalities and Other Units of Local Governments


The 2005 Federal Deposit Insurance Reform Conforming Amendments Act required the Federal Deposit Insurance Corporation (FDIC) to study the feasibility and consequences of several issues, one of which was increasing the limit on deposit insurance coverage for municipalities and other units of general local government.

The FDIC’s recent report to Congress did acknowledge arguments for increasing municipal deposit coverage;

  1. Public deposits could remain in local institutions where they could be used to meet local needs.
  2. Bank operations could become more efficient and less costly by lessening the need for public depositories to provide collateral.
  3. Provide a higher degree of safety and additional protection for taxpayers.
  4. Permit small financial institutions to compete more effectively for public deposits.

However, the FDIC also suggests three main arguments against increasing municipal deposit insurance coverage;
  1. Increasing coverage for one class of depositor is inconsistent with the traditional goals of deposit insurance, which are to;
    a. Promote financial market stability by maintaining depositor confidence in the banking system.
    b. Protect the nation’s economy from the disruptive effects of bank failures.
    c. Protect the deposits of small savers.

  2. Increasing coverage for one class of depositor could adversely affect moral hazard and market discipline. In the FDIC’s “definition” moral hazard implies public depositors would be less likely to monitor the risk behavior of their depository institutions if they know the FDIC is providing additional insurance coverage.

  3. Additional coverage is likely to increase deposit insurance assessments possibly increasing banking costs.

In its summary, the FDIC did concede that increased federal coverage for public deposits could benefit local governments by lowering bank costs and increasing security for taxpayers. But the report pointed out that increased federal coverage would be a departure from the traditional goals of federal deposit insurance by increasing coverage for one class of depositor and would likely increase moral hazard and deposit insurance assessments. Finally, the report suggested credible private sector alternatives to increased federal coverage such as surety bonds and deposit-placement services. Review the FDIC’s entire article regarding increased insurance coverage for municipalities at www.fdic.gov/bank/analytical/quartely/index.html.

The FDIC is considering several options for structuring increased insurance coverage; however, Congressional authorization is required for the FDIC to provide this coverage to municipalities. If you would like to review options currently available to secure your bank deposits, please contact Ken Herdeman at BBE Community Investments Partners, LLC at 262-796-6164 or kherdeman@bankersbankusa.com.




April, 2008




Information obtained is from sources we believe to be reliable but we do not guarantee accuracy. Neither the information, nor any opinion expressed, constitutes a solicitation by us of the purchase or sale of any security. Yields, rates and prices are subject to change and availability. Past performance does not guarantee future results.