If you have money invested in a stock or mutual fund, your brokerage/bank can't use that money to maintain its liquidity. It is a security that you own.
However, if you have it sitting in cash in a bank or a brokerage account, the institution can now take 100% of that money (because reserve requirements have been eliminated) and use it for its own ends to keep itself afloat. A bank deposit is no more than an unsecured loan from the depositor to the bank.
Accordingly, a Dow scare that causes investors to pull their money out of stocks and into their cash accounts will help the liquidity problems of the banks and brokerages. A drop of 1000 points in the Dow could be equivalent to a multi-trillion dollar bailout package for Wall Street.
So if Cramer and the talking heads on CNBC stop calling a bottom and begin encouraging investors to sell, there may be deeper motives.
The money in the bank is guaranteed by the FDIC whereas the stock can go down to zero. That's why we are seeing that kind of movement in Wall Street.
Posted by: Trade Meme | October 09, 2008 at 05:55 AM