Transcript Product Management 2008 / 2009 Review Presented to Tampa

GOT MONEY?
October 6, 2009
Introduction
This session will provide you with a
foundational look at the
collateralization of public funds
deposits in South Carolina.
Also, we will detail the changes in
FDIC coverage that occurred in
October 2008 and have recently
been extended.
Why?
 There are two pieces of the South Carolina Legislative code that
deal directly with this subject
 Section 11-13-60
• (A) A qualified public depository, as defined in subsection (E)
of this section, upon the deposit of state funds by the State
Treasurer, must secure these deposits by deposit
insurance, surety bonds, investment securities, or letters of
credit to protect the State against loss in the event of
insolvency or liquidation of the institution or for any other
cause. To the extent that these deposits exceed the amount
of insurance coverage provided by the Federal Deposit
Insurance Corporation, the qualified public depository, at
the time of deposit, shall:
• (1) furnish an indemnity bond in a responsible surety company
authorized to do business in this State; or
Why?
 Section 11-13-60
• (2) pledge as collateral:
• (a) obligations of the United States;
• (b) obligations fully guaranteed both as to
principal and interest by the United States;
• (c) general obligations of this State or any
political subdivision of this State; or
• (d) obligations of the Federal National
Mortgage Association, the Federal Home
Loan Bank, Federal Farm Credit Bank, or
the Federal Home Loan Mortgage
Corporation; or
Why?
 Section 11-13-60
• (3) provide an irrevocable letter of credit issued
by the Federal National Mortgage Association,
the Federal Home Loan Bank, Federal Farm
Credit Bank, or the Federal Home Loan
Mortgage Corporation, in which the State
Treasurer is named as beneficiary and the
letter of credit otherwise meets the criteria
established and prescribed by the State
Treasurer. The State Treasurer shall exercise
prudence in accepting collateral securities or
other forms of deposit security.
Why?
 Section 11-13-60
• (B)(1) A qualified public depository has the following options:
• (a) To secure all or a portion of uninsured state funds under the Dedicated
Method where all or a portion of the uninsured state funds are secured
separately. The qualified public depository shall maintain a record of all securities
pledged, with the record being an official record of the qualified public depository
and made available to examiners or representatives of all regulatory agencies.
The State Treasurer shall maintain a record of the securities pledged for
monitoring purposes.
• (b) To secure all or the remainder of uninsured state funds under the Pooling
Method where a pool of collateral is established by the qualified public depository
under the direction of the State Treasurer for the benefit of the State. The State
Treasurer shall determine the requirements and operating procedures for this
pool. The depository shall maintain a record of all securities pledged, with the
record being an official record of the qualified public depository and made
available to examiners or representatives of all regulatory agencies. The State
Treasurer shall maintain a record of the securities pledged for monitoring
purposes.
• (2) Notwithstanding the provisions of item (1) of this subsection, the State
Treasurer, when other federal or state law applies, may require a qualified public
depository to secure all uninsured state funds separately under the Dedicated
Method.
Why?
 Section 11-13-60
• (C) A qualified public depository shall not accept or retain any state
funds that are required to be secured unless it has deposited
eligible collateral equal to its required collateral with some proper
depository pursuant to this chapter.
• (D) The State Treasurer may assess a fee against the investment
earnings of various state funds managed or invested by the State
Treasurer to cover the operation and management costs associated
with this section and Section 6-5-15(E)(1)(b). These fees may be
retained and expended to provide these services and may not
exceed the actual costs associated with providing the services.
• (E) "Qualified public depository" means any national banking
association, state banking association, federal savings and loan
association, or federal savings bank located in this State, and any
bank, trust company, or savings institution organized under the law
of this State that receives or holds state funds that are secured
pursuant to this chapter.
Why?
 Section 11-9-660
• A) The State Treasurer has full power to invest and reinvest
all funds of the State in any of the following:
• (1) obligations of the United States, its agencies and
instrumentalities;
• (2) obligations issued or unconditionally guaranteed by the
International Bank for Reconstruction and Development, the
African Development Bank, and the Asian Development
Bank;
• (3) obligations of a corporation, state, or political
subdivision denominated in United States dollars, if the
obligations bear an investment grade rating of at least
two nationally recognized rating services;
Why?
 Section 11-9-660
• (4) certificates of deposit, if the certificates are secured
collaterally by securities of the types described in items (1)
and (3) of this section and held by a third party as escrow
agent or custodian and are of a market value not less than
the amount of the certificates of deposit so secured, including
interest; except that this collateral is not required to the
extent the certificates of deposit are insured by an agency of
the federal government;
• (5) repurchase agreements, if collateralized by securities
of the types described in items (1) and (3) of this section
and held by a third party as escrow agent or custodian
and of a market value not less than the amount of the
repurchase agreement so collateralized, including
interest; and
Why?
 Section 11-9-660
• (6) guaranteed investment contracts issued by a domestic or
foreign insurance company or other financial institution,
whose long-term unsecured debt rating bears the two highest
ratings of at least two nationally recognized rating services.
• (B) The State Treasurer may contract to lend securities
invested pursuant to this section.
• (C) The State Treasurer shall not invest in obligations issued
by any country or corporation principally located in any
country which the United States Department of State
determines commits major human rights violations based on
the Country Reports on Human Rights Practices by the
Bureau of Democracy, Human Rights and Labor of the U. S.
Department of State.
Federal Depository Insurance Corporation
Purpose
The Federal Deposit Insurance
Corporation (FDIC) preserves and
promotes public confidence in the U.S.
financial system by insuring deposits in
banks and thrift institutions by
identifying, monitoring and addressing
risks to the deposit insurance funds; and
by limiting the effect on the economy and
the financial system when a bank or thrift
institution fails.
Federal Depository Insurance Corporation
 October 3, 2008
 President George W. Bush signed the Emergency
Economic Stabilization Act of 2008, which
temporarily raises the basic limit on federal
deposit insurance coverage from $100,000 to
$250,000 per depositor. The temporary increase
in deposit insurance coverage became effective
immediately upon the President’s signature. The
legislation provides that the basic deposit
insurance limit will return to $100,000 on
December 31, 2009.
 This has now been extended thru December
31, 2013.
Federal Depository Insurance Corporation
 Temporary Liquidity Guarantee Program (TLGP)
 October 14, 2008 - FDIC announced its temporary
Transaction Account Guarantee Program, which
provides full coverage for noninterest-bearing
transaction deposit accounts at FDIC-insured
institutions that agree to participate in the program.
The transaction account guarantee applies to all
personal and business checking deposit accounts that
do not earn interest at participating institutions. This
unlimited insurance coverage is temporary and will
remain in effect for participating institutions through
December 31, 2009.
 This has been extended for six months thru June 30,
2010
Investment Options
Certificates of Deposit
Collateralized CD’s
CDARS
One statement, one banking relationship, one rate
Full FDIC coverage
SC does not require additional collateral outside of
FDIC coverage
Investment Options
 NOW Account ***
 Deposit accounts which consist solely of funds in which the entire
beneficial interest is held by:
 One or more individuals, including sole-proprietorships.
 A not-for-profit organization operated primarily for religious,
philanthropic, charitable, educational, political, or other
similar purpose.
 Officers, employees, or agents of public entities (public
funds).
 Funds held in a fiduciary capacity (bank trust department,
individual fiduciary, or trustee in bankruptcy), provided that
all beneficiaries are natural persons.
***NOW Accounts paying 50bp or less are eligible for
100% coverage according to the FDIC’s TLG Program.
Investment Options
 Money Market Deposit Account
 An MMDA is a savings deposit that permits,
under the terms of the deposit contract or by
practice of the financial institution, the depositor
to make no more than six transfers and
withdrawals per calendar month or statement
cycle of at least four weeks to another account
of the depositor or to a third party. No more
than three of the six transfers can be made by
check, draft, debit card, or similar order to a
third party.
 Insured to the $250,000.00 limit by FDIC
Repurchase Sweep Account
 A Repurchase Sweep takes any excess balances above an established
Target Balance and invests in obligations or those that are fully
guaranteed as to the principal and interest by the U.S. Government or
agency and are collaterized at or above 100% of market value.
 The Bank’s Treasury Desk maintains an account at the Federal
Reserve that holds a “pool” of securities that may include the following:
 Freddie Mac
 Fannie Mae
 Ginnie Mae
 Federal Home Loan Bank
 Federal Farm Credit Bank
Repurchase Sweep Account
Each repurchase client will receive daily
notices of what their collateral consists of
Each day as the bank repurchases the
collateral, the principal plus interest earned
sweeps back into the deposit account
Repurchase Sweep Account
Government Sponsored Entities
US Conservatorship in 2008
Repurchase Sweeps invest in mortgage backed
securities (bonds) and not in the stock of the
GSE
Sour Instruments
Collateralized Debt Obligation
Investors bear the credit risk
Multitude of credits of varying risk and maturity
Three Categories
Senior
Mezzanine
Subordinated/Equity
Sour Instruments
 Subprime Mortgage
 Lower credit scores
 Interest only
 Adjustable Rate Mortgage
 Minimum payment, Interest only, ARM
 Higher Foreclosure
 Rates reset, payments triple
Apocalypse Now?
 What happens when an institution fails:
 A) FDIC sells the assets and liabilities to another institution, or
 B) FDIC assumes the responsibility for all liabilities (deposits)
according to the published limts, and sells the assets (loans) over a
period of time
 In the case of an Overnight sweep function, at the close of business
all debits and credits are performed including the investment into a
repurchase sweep. If the FDIC performs option A, then the funds will
sweep back into the account under the new institution name, and if
the FDIC performs option B, then the holder of the collateral will sell
that on the open market via the Federal Reserve account holder in
order to regain their liquid funds.
THANK YOU!
Questions?