by Rich Edwards Apr 7, 2023

Maxing deposit insurance, investors and interest rates

Sweep accounts, brokered deposits, assets + rates, and how parking meters can be like banking software

The tyranny of city dwellers world wide, and made worse by poor design

Welcome to 2Q, the end of lent, and the beginning of what promises to be a crazy earnings announcement season. The coming tide of “will they or won’t they” of recession. For your week-ending reading pleasure, we bring you three prime choices. First is a behind-the-scenes look at deposit insurance practices. Then, the investor perspective on rising interest rates. Finally, an analogy of the humble parking meter as any complicated process.

1. Deposit insurance maximization as a service

With all the talk on FDIC deposit insurance limits, Patrick McKenzie at Bits About Money wrote this week on the business and mechanics of sweep accounts and brokered deposits. Also, he shows the connection to community and regional banks’ outsized exposure to the commercial real estate (CRE) market.

Many commercial real estate operators in your neighborhood keep amounts well in excess of FDIC insurance limits on deposit at one or more banks, including banks which do not historically have a de facto government guarantee of a rescue. Bank sales reps made this a condition to get loans done in favorable fashions at favorable prices. (Sometimes this condition is called a “loan covenant” and carries contractualized damages if breached. Sometimes it is just a gentleman’s agreement. Sometimes contracts are more like a gentleman’s agreements if gentlemen don’t expect you to continue existing to enforce your rights under them.)

This fact makes commercial real estate operators keen observers on the health of banks. If you look at the recent history of banks in trouble, you will find commercial real estate operators reacting very quickly to bad news. One of the reasons deposit flight affected, and is affecting, many more than a small set of financial institutions is that many banks bank commercial real estate operators. There is strong mutual dependence between community banks and the real estate industry; most of the country only has apartments and offices because of this symbiosis.

2. And the Fed taketh away

Anthony Pompliano captured investor perspective and “truisms” on rising interest rates in his substack post this week. A few of the choice quotes from a buy-side perspective:

Warren Buffett famously said, “Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices.” If asset prices go up, every asset owner is getting wealthier. The incentive is for people to demand lower and lower interest rates from their central bank. Ludwig von Mises nailed it years ago by stating, “Public opinion always wants easy money, that is, low interest rates.”

Regardless of public opinion, professional investors know that interest rates are the name of the game. The old adage of “Don’t fight the Fed” has been popularized for a reason. Ray Dalio is famous for saying, “It all comes down to interest rates. As an investor, all you’re doing is putting up a lump-sump payment for a future cash flow.” So when interest rates go up, there is pain in the economy.

Former President Bill Clinton once said, “You know what higher interest rates mean. To you it means a higher mortgage payment, a higher car payment, a higher credit card payment. To our economy, it means business people will not borrow as much money, invest as much money, create as many new jobs, create as much wealth, raise as many raises.” It is not every day that we can point to a politician as a macro expert, but he got that one right.

Interest rates are the name of the game. Will the Fed continue hiking or will they wave the white flag? No one knows for sure. Whoever guesses correctly in the coming months, both in terms of direction and magnitude, will have a competitive advantage when allocating capital.

3. On replacing bad systems with bad systems

A quick (they’re all quick) post from Seth Godin. He warns of the perils of not putting people first in your approach to solving problems. Using an analogy of parking meters:

Over the years, parking meters in town have evolved into a cumbersome, awkward system. Coins are heavy and you need to have them handy, meters need to be reinforced against theft and breakage, town employees have to empty the coins and securely deliver them to the bank, meter feeding allows local employees to hog spaces that might be used for shoppers… you get the idea…

Enter an app that promises everything to everyone. Except it increases the cost by more than 100% by charging fees, it’s awkward, has a silly password policy that makes it cumbersome to use, sends many many emails to users and it doesn’t generate more revenue or flexibility for the town. It charges people double and gives them less.

Design thinking is simple to describe in two questions:

  • Who’s it for?
  • What’s it for?

In the case of a system replacing a previous system, these questions often get replaced with:

  • What’s the easiest way to polish what we compromised on last time?

So it ends this first week in April. Remember, even lowly drug store cameras can have history-making moments. And thanks for reading to the end. Let us know one thing you loved or hated about this post at

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