(Originally published on ValueWalk April 28, 2020)

Mark Twain is reputed to have said that “history does not repeat itself, but it rhymes.” The events of the past few months have certainly conjured up many memories of the Financial Crisis, and for those following bank stocks, the emotional roller coaster of 2008-2009 feels all-too-present today. The fate of many of our nation’s banks may rest largely on how long our economic paralysis is sustained in support of the greater good of public health.

Bankers and research analysts agree that American banks are much better-capitalized than they were a dozen years ago and should be able to withstand several months of severe economic contraction. But if the economy were to remain largely shut for six months, absent a windfall of additional money-printing from the Fed, another financial crisis could ensue atop our existing humanitarian crisis.

With all this doom and gloom, there is a glimmer of hope. Like every other financial or humanitarian catastrophe to befall our modern age – World War I, The Great Depression, World War II, Black Monday, the collapse of Long Term Capital Management, the Dot-com bust, 9/11, and the most recent Financial Crisis  – the path downwards has been followed by an even more ebullient path upwards. The shape, timeline, and certainly of any future recovery is unknowable, but we can hold out hope that it will at least rhyme with the events of the past.

I’ve had the experience of living and working through several market dislocations. From each one, I’ve sought to learn how to extrapolate from relevant data and facts, and, perhaps more importantly, how to recognize and curtail emotions. While every investment brochure disclaims that “past performance is not indicative of future results,” as an investor, it’s important to learn from your own past performance and journal your mistakes. Only by dissecting your thought processes at the time – both rational and emotional – can you endeavor to make better decisions the next time you are faced with a similar set of facts and circumstances.

Online Banks: The Financial Crisis As Inspiration

I was stationed in Tokyo during the Financial Crisis, working as an investment banker for one of the largest American banks, which had recently acquired one of Japan’s largest brokerage firms. I arrived in August 2007, just after closing the last private equity-based capital raise that involved so-called “Toggle Notes,” where a borrower could elect whether to pay the interest it owed in cash or in-kind (i.e. more debt.) It was illustrative of just how favorable the capital markets had become for issuers – a sign of a raging bull market where seemingly nothing could go wrong.

As an analyst on Wall Street in the late 90s, I learned that the hallmark of the late stage of a bull market is when the market “climbs a wall of worry.” In other words, in spite of each piece of bad news that could befall the economy, stock market indices continue to march upwards. In addition to overly accommodating capital markets, several other more pedestrian warning signs were also present by the summer of 2007. The drivers who shuttled me home from the office late at night were increasingly talking about their stock market gains and the houses they were flipping for profit. In-flight magazines contained countless ads for hi-rise luxury condominium developments. Were these signs of a healthy economy where the rising tide lifts all boats, or a warning that the pace of wealth creation was unsustainable?

As 2007 progressed into 2008, the unsustainability of the bubble in asset prices became all-too-apparent, and banks began to fail. From 2008 through 2012, the FDIC closed a staggering 465 banks. To put this in context, in the five years prior to 2008, only ten banks had failed. The bank where I worked didn’t fare much better. Bearing witness, first-hand, to such a precipitous fall from grace taught me an important lesson in the fragility of banks. No matter how storied the name or how solid the marble that adorns its branch entrances, banks exist at the pleasure of investors and depositors’ willingness to extend credit in exchange for levered returns.

The Importance Of Keeping Cash Safe

In response to the Great Depression, President Roosevelt and Congress enacted the Banking Act of 1933, paving the way for the creation of the Federal Deposit Insurance Corporation (FDIC). When my bank’s share price hit $0.97 in March of 2009, it struck me that much of my cash held at that bank might be in peril. While the FDIC provides deposit insurance, that coverage is limited, and every dollar that you hold above the FDIC insurance cap makes you, in effect, an unsecured creditor of that bank. I realized that in order to keep cash safe, I needed a better solution.

I began researching options for cash. Many banks and brokerage firms offered brokered deposit solutions, where a bank takes your excess deposits and sells them to other banks. The pitch is that this helps you obtain increased FDIC coverage, and so you should feel safe keeping all of your funds at your home bank or brokerage account. But my research revealed several risks inherent in this system, as well as large conflicts of interest. If I was to ensure all my cash was safe and liquid, I needed a better solution.

The best thing I could think of was to open new bank accounts at multiple banks and diversify my holdings by spreading my cash across them. I’d hold each account in my own name, control how much was kept at each bank (to ensure all funds remained below the FDIC limit at each bank), and retain full same-day liquidity at each bank. Unlike brokered deposits, where you might not be fully insured if the broker sells your deposits to a bank where you already hold accounts, and where you could lose access to all your funds if your main bank goes under, with my strategy, I knew that I’d maintain full control, full liquidity, and full FDIC-insurance coverage.

Online Banks And Interest Rates

In 2009, online banking was still relatively nascent, but, it turned out, opening new accounts at online banks was much faster and easier than going into a bank branch. I opened accounts at several of the leading online banks, which also happened to offer higher interest rates than their brick-and-mortar peers, owing to their lower operating cost structure. Much like Amazon had figured out how to sell a textbook cheaper by eschewing physical stores, online banks applied this concept to banking, making it possible to earn a higher interest rate on FDIC-insured savings accounts.

Still, the online banks changed their rates with great frequency, and often when I logged in to check my balances, I found that interest rates had changed. It occurred to me that I could move funds from one bank to another to benefit from yet-higher interest rates. For the next three-and-a-half years, I found myself logging in each month, checking rates, and manually moving funds from bank to bank to obtain the highest yield while keeping all my funds FDIC-insured.

This strategy could be highly lucrative (effectively capturing a pure arbitrage in the market for bank deposits) but also a huge time sink. There had to be a better way. How could I automate this process, so that my money could continue to earn the highest yields possible without my having to lift a finger? And if I could find a way to automate the management of my own cash, why couldn’t I open up this same strategy to anyone else who wanted to simultaneously earn higher yields with less risk?

Online Banks: Conclusion

The result: I created my own automated cash management platform – MaxMyInterest.com. Seven years and three patents later, Max is now the highest-yielding cash management solution in the United States, used by financial advisors at thousands of wealth management firms with more than $1 trillion of assets under management. With a top yield of 1.71%, Max stands above all other cash options offered by banks and brokerage firms – yet, the core premise remains the same as it was back in 2009: deliver the best yields, fully FDIC-insured, with same-day liquidity and no conflicts of interest.

While it may be difficult to envision now, the COVID-19 crisis shall too pass. And, if history does indeed rhyme, in its wake American ingenuity and determination will likely push our economy and financial markets yet higher – although the recovery may be long and uneven. As an investor, your appetite for risk may again increase, too. But for the portion of your portfolio that remains in cash, you should remain as protected and earn as much as possible.

To some, the global financial crisis of 2008-2010 may seem a distant memory. But it was almost 11 years ago today that the crisis was at its peak, sending some of the largest banks in the country to the brink of insolvency, while others failed entirely. As lending dried up, the broader economy suffered, leading the S&P 500 Index to decline by more than 50%, a dramatic fall that shook the confidence of an entire generation of investors.

Banks that seemed rock-solid were failing, and the larger the bank, the more complex were its exposures and thus the more difficult it was to assess its safety. It was against this backdrop that I began managing my own cash more actively, in search of greater safety and liquidity.

The Role of the FDIC

In the wake of the Great Depression, President Franklin D. Roosevelt and Congress enacted the Banking Act of 1933, which paved the way for the creation of the Federal Deposit Insurance Corporation. The FDIC helped create a level playing field for banks, backstopping depositors with the full faith and credit of the U.S. Government. The FDIC thus conferred upon bank deposits the same credit risk as U.S. Treasurys — up to a cap — giving depositors confidence that their deposits were safe.  

During the Financial Crisis, the FDIC raised the deposit insurance limit to $250,000 per depositor, per account type, per bank charter, and it has remained at this level ever since. By spreading cash across multiple banks, depositors can avail themselves of even more FDIC insurance coverage, making it possible to keep even larger sums of cash fully insured. 

Maximizing Yield and Safety

At the time of the Financial Crisis, I was working as an investment banker at one of the largest banks in the country and witnessed first-hand the risks that depositors faced, particularly if they were holding more than the FDIC insurance limit in cash. I started looking for a way to keep my own cash safe and liquid. 

Brokerage firms were marketing brokered deposit solutions that they claimed increased deposit insurance coverage, but the deeper I dug into these products, the more flaws I found. I determined that these brokered deposit offerings — in which a bank or brokerage firm sells your deposits to other banks to earn a profit while claiming to offer increased FDIC coverage — all suffered from the same fundamental flaw: the funds all flowed through an intermediary institution, so if the institution selling brokered deposits were to fail, depositors might lose access to all their funds until that institution was bailed out. Put differently, these solutions — marketed as a means of reducing risk — were in fact riskiest in precisely the circumstances that they were designed to help you avoid.

I decided that the best way to keep cash safe was much simpler: keep it in my own bank accounts. I could hold these accounts directly in my own name and spread my cash across multiple banks so that even if one bank were to fail, I’d still have access to funds at other banks while the failing bank went through the FDIC resolution process. No brokers. No intermediaries. Just my own cash sitting in my own bank accounts.

The challenge, of course, was monitoring all of these accounts. I found myself logging into multiple bank accounts each month to monitor balances and rates. Accrued interest pushed me over the FDIC limit, and as time went on, I noticed that banks were changing their rates all the time, meaning that I found myself having to constantly monitor rates and shift funds from bank to bank to ensure I was getting the best deal. There had to be a better way.

My experience managing cash during the financial crisis led to the creation of MaxMyInterest, a simple cash management solution that fully automates this cash management strategy, enabling anyone to benefit from increased FDIC insurance coverage and higher yields. Max is now used by advisors at more than a thousand wealth management firms with collectively more than $1 trillion of assets under management. Clients using Max typically earn thousands to tens-of-thousands of dollars of incremental interest income each year, automatically. 

How Max Works

Max works by helping you link your existing brick-and-mortar checking account or brokerage account to your choice of higher-yielding online banks. Each bank is backed by FDIC insurance coverage. By spreading funds across multiple banks, you can increase liquidity and FDIC insurance coverage at the same time. And because online banks have lower operating costs, they tend to pay much higher rates than brick-and-mortar banks or brokerage firms, so you can earn higher returns on your cash at the same time.

Opening new bank accounts is now easier than ever. You can open as many accounts as you like, and unlike credit cards, there’s no impact to your credit rating when you open savings accounts. The Max platform makes it even easier, making it possible to open, link, and begin funding new savings accounts in as little as 60 seconds using Max’s patented Common Application. But even without Max, you can pursue this same strategy of opening and managing a portfolio of bank accounts on your own.

Max simply automates the process for you, monitoring interest rates daily. Each month, Max helps your funds flow whichever of your banks is offering the highest interest rates. So not only do you benefit from increased safety and liquidity, you can earn higher yield, too.

The Fed Funds Rate

When Max launched in 2014, the Fed Funds target rate was 0% to 0.25%. You can think of the Federal Reserve as a bank for banks, and so the Fed Funds rate is effectively the rate at which banks can borrow from (or lend funds to) the Fed overnight. Against that backdrop, the average rate paid on savings accounts across the country was a paltry 0.12%. Still, online banks — owing to their lower operating costs — were able to pay higher yield, approximately 0.90% at the time. As a result, depositors who were astute enough to open savings accounts at online banks could pick up an extra 80 basis points, or 0.80%, of risk-free incremental return, simply by being a bit smarter about where they were holding their cash. 

Beginning in December 2016, the Fed began raising rates in earnest. Online banks raised their rates, too, reaching a peak of 2.25%. The banks supported on the Max platform raised their rates even higher, since Max saves them from having to spend money on advertising or customer acquisition. As a result, the top rate earned by Max members reached 2.72%, a rate that enabled customers to earn more on cash than they might pay on a 7/1 adjustable-rate mortgage!

As the Fed has begun to cut rates, the rates paid by online banks also began to decline, but at a slower pace than the Fed rate cuts. Bankers call the relationship between the change in interest rates paid by banks and the Fed Funds rate the deposit beta. At lower interest rates, online bank deposit betas have tended to average around 0.6, which means that for every 100 bps change in the Fed Funds rate, banks only adjust their rates by 60 bps.

At Max, our data suggest that if the Fed were to lower its target range to 0% to 0.25% (as it was following the Financial Crisis), the online banks will still pay approximately 0.80% to 1.00% on savings accounts. So while interest rates may not be as high as they were in 2019 when the economy was booming, savvy depositors can still earn above-market rates on cash simply by paying more attention to where they keep their funds.  

The Yield Curve

We’re living through extraordinary times. The shock of 9/11 pummeled airlines and impacted the economy, but as a country, we rebounded and rebuilt and enjoyed a long bull run that lasted from the Gulf War through to the Financial Crisis. The Financial Crisis prompted a deeper and more prolonged shock to the economy, but the 11-year bull run that has followed generated tremendous wealth, particularly for those who had liquidity and were able to buy at or near market lows. It’s still too early to estimate the impact of COVID-19 on the markets, but at present, it appears that we’re in for both supply and demand shocks, which could result in a prolonged recession that will require fiscal stimulus, not just monetary stimulus. At present, the most pressing social issues relate to health and safety. Financial recovery cannot begin until our epidemiological prognosis improves.

The Role of Cash

In good times, holding cash may feel like a wasted opportunity, as it often barely keeps pace with inflation. But cash is, as it turns out, a remarkably valuable thing to have on hand when markets turn volatile, both because it gives you the confidence to avoid selling at the wrong time, and also the ability to buy at the right time. While you can’t perfectly time the market, it’s possible to be disciplined about increasing your exposure to the market over time through dollar-cost averaging. Removing emotion from the equation enables you to buy equal amounts when stock prices are rising or falling, smoothing out your cost basis. It might feel counterintuitive, but that’s often the winning strategy, enabling you to follow Warren Buffet’s advice to be “greedy when others are fearful.” 

Those who had sufficient cash reserves to resist the temptation to sell, or who bought the S&P 500 during the scariest days of the Financial Crisis, ultimately experienced a more than 300% gain in the decade that followed. While it can be tempting to let emotion sidetrack your long-term plans, holding a large cash cushion can give you the fortitude to remain a disciplined investor and focus rationally on the long term. And if you’re going to hold a cash cushion, you ought to ensure it’s safe and earning as much as possible. If history is any guide, Max will continue to deliver the highest yields in the market on fully-insured, same-day liquid deposits.