Credit crisis triggers 'flight to safety'

Consumers moving their money into CDs, US Treasuries

The flight to safety is lifting off.

The recent credit crisis, coupled with a string of bank failures earlier this year, has prompted some consumers to move their money into ultrasafe investments or fully insured accounts.

Savings accounts at community banks, mutual funds that invest in bonds, and money market mutual funds that own government debt have seen an influx of money throughout the year that some industry analysts expect to continue with the recent turmoil on Wall Street.

At Fidelity Bank in Leominster, president Ed Manzi said new accounts have jumped 20 percent since the summer. "At a time like this, peace of mind is a big deal," Manzi said.

Timothy Grobleski of Arlington ordinarily would part of what he receives from retirement payments into stock-based mutual funds. But since July he's been putting the whole lot into certificates of deposit at Cambridge Savings Bank.

"I'm not comfortable being in any area that has the potential of losing equity," he said.

Tim Carroll, a financial planner who lives in Wellesley, said he switched money market mutual funds last week to those that invest in US Treasuries, which he called "the modern-day equivalent to money under the mattress."

In fact there was such a rush to buy ultrasafe government debt that last week interest rates on short-term Treasuries sank to less than 1 percent. Investors were in essence choosing to make almost no money over living with the risk that their investments might lose money.

Just yesterday, industry data provider iMoneynet.com reported that investors put $16 billion into money market mutual funds that invest in safer government securities, while withdrawing more than $10 billion from money funds with corporate investments.

Money market mutual funds are investments that can lose money, and until the crisis last week in which several funds did lose money they were not insured by the government. Savings, checking, and money market accounts are bank deposits that are insured up to $100,000 by the Federal Deposit Insurance Corp.

These kind of swings happen frequently in periods of market turmoil, a phenomenon bankers call, a "flight to safety." Most of the evidence to date, however, is anecdotal, or of such a small snapshot in time that it's difficult to conclude how big or deeply set the trend is now.

For example, as of June 30, deposits in insured bank accounts were growing at a faster rate this year than in previous years, and now total $8.5 trillion, up 6.7 percent from the prior year period.

James Chessen, chief economist for the American Bankers Association, said the faster growth in deposits suggests consumers are moving away from putting money in uninsured products - though he said he would like to see more data before making a final conclusion.

Indeed, most of the dozen people interviewed in downtown Boston by the Globe yesterday said they are leaving their investments alone for now.

Dana Long, a software engineer from Belmont, said he's not moving his money because, "it's either going to go all to hell or be fine."

But even before the crisis erupted full-bore last week, local banks around Massachusetts said they had begun to see small but steady increases of deposits in insured accounts, especially after the failure of IndyMac Bancorp this summer. While depositors at IndyMac had their accounts insured by the FDIC, state-chartered banks in Massachusetts provide 100 percent coverage thanks to a government insurance program that dates back to the New Deal.

Some local bank executives say that extra insurance is a definite draw for new depositors.

"They're not sure what's going to happen to their money, and we can guarantee safety," said Mariane Broadhurst, senior vice president at Benjamin Franklin Bancorp in Franklin. Core deposits at the bank are up by $37 million so far this year, compared with $30 million for all of 2007.

Benjamin Franklin is one of a number of local banks trying to take advantage of the worry among consumers by launching new advertisements about the safety of their accounts.

"Your mattress is only good for two things. And neither are FDIC insured," the Benjamin Franklin ad reads.

Even those remaining active as investors are choosing the traditional safer bonds over stocks. Mutual funds that invest in government-backed securities took in $19.6 billion through July 31 this year, compared to just $2.3 billion over the same period last year, according to industry watcher, Financial Research Corp. Meanwhile, corporate stock funds reported just $4.5 billion in new money flows during that time, compared to $39.8 billion in the 2007 period.

Globe correspondent Erich Schwartzel contributed to this report. Material from Globe wire services was used in this report. Ross Kerber can be reached at kerber@globe.com.