Ironically, now that Federal Reserves are busy guaranteeing bank deposits they have created a whole new set of problems in the competition for capital.

It would be easy to jump to the conclusion that banks should borrow money at the same rate the government does if it’s now the same risk. It’s not that simple. Fussy money (money sensitive enough to deposit rates that it gets moved) is leaving the banks who are reducing their deposit rates to find a new home paying a higher rate of return. That money sometimes just changes bank or asset class within a country but it can also change countries which opens up a whole bunch of foreign exchange activity. So banks need to pay a higher deposit rate than the Government does to attract investment, despite having a Government Guarantee.

If banks lower their deposit rates because they have a government guarantee they risk losing funding. At the same time the margin they make between lending and borrowing increases. This quandary of protecting liquidity versus improved margins is a whole new ‘how low can you go’ game in the banking sector for deposit rates.

We know in business that small increases in prices cause much larger increases in profit. The impact on your P&L is magnified due to the change in your margins (the difference between where you buy and sell your goods). The same magnifier applies to bank margins but also in a far more leveraged way because they usually have around $10 of assets for every $100 of loans and deposits. Even a small 0.10% change in deposit rates (cost of funds) has large implications for profit or lower mortgage rates (in lieu of profit).

Thus an ethical dilemma exists for banks to keep the margin or pass it on. Should banks be forced to pass on any gain from the government guarantee to their borrowers or are market forces best placed to do this?

Many uncertainty that surrounds how long with the guarantee will exist and how many deposits it covers manifests itself in higher deposit rates despite the guarantee.

Personally I’m against the government guarantee, why give banks more help than they need. Why risk seeing capital shift offshore looking for higher rates of return. Why not step in at the ninth hour and save the odd bank that looks like collapsing but only if all other avenues have been explored. This would be better than handing out free money to a sector who have made more than enough over the last 10 years to muscle them through a recession.

Money will always flow toward the best rate for a common risk and liquidity profile in markets. So a government guarantee does not imply you should only earn the same rate from a bank that the government would pay to borrow money. If anyone from a bank tells you otherwise then it’s misleading.

One of our Saasu customers optimises Web 2.0 in it’s original meaning. He uses 88miles.net for tracking time on projects against customers and uses Saasu.com for his accounting ledger, tax and so on. 88miles and Saasu’s API’s have a little chat during the day keeping all his stuff in line, like a couple of fax machines having a banter. bidi bidi bidi beeeeep bidi bidi bidi —– Don’t you love that, it’s not humans having to do it!

What the customer actually has is a virtual application. Two distinct applications developing and enhancing separately but operating as one. Very cool.

Portfolio managers use tools to optimise placement of investments. It’s all about rigour and hard maths. So to should we optimise how we spend our time. It’s all too easy to concentrate on money, it’s in your face day in and day out, but people forget to act on the well known truth that time is money. You cannot separate the two.

Myles Eftos of Madpilot Productions built the 88miles.net connector, so a hat tip to the mad pilot. Check out his blog he shoots from the hip which is just how I like it.

I love a lot of what 37 signals are about but I must say I don’t agree with David’s view that monetize is word we don’t need. Monetize doesn’t mean making money. Monetization is a conversion process, which is why I like the word (even though I use it sparingly because it is so misunderstood). For example you can monetize your house by selling it. That doesn’t make any money it just changes the form of the asset.

If people paid more attention to the process of monetization they can indirectly make some money. How you ask? Assets all fluctuate in value. Employing monetization when you want to convert unrealised asset value into realised asset value is key. Lack of asset liquidity is a problem that monetization techniques address, but strictly speaking it doesn’t make you any money, just realises the gains or losses. What you build, sell and do makes the money in reality. Landscape your house to make some money, sell it to monetise it.

For people without investment banking backgrounds this could make or save you a fortune. Worst case it might take the blinkers of your eyes around the topic of free or cheap options that are all around us.

There’s a simple test to see if something is like a option. Have you been given the right to do something for free or cheaply for a period of time. If so, then it’s an option and has financial value.

Here’s a few examples:

Quotation Option

Getting a quote is a chance to better a price. So each quote has value while a vendor has agreed (or implied to agree) to beat any other price.

Reverse Auction Option

I once bought a car from my desk. I called six dealers and told them I will buy the car specified in the fax I was sending them at 4:00pm that afternoon. I told them they were in competition and that my purchase was only about price. I repeated this to make it clear. I said that you only get one quote, no second chance. Five dealers faxed me their prices, one refused and one was extremely aggressive on pricing whom I ended up buying from. I removed variance in the product with my faxed instructions and specs. e.g. removing service location as a consideration. I saved 18% off the list price.

Pricing Mechanism Option

Continuing from above, I was told that this dealer network closed their sales books mid month (another option they had with their manufacturers where if they exceeded ‘x’ sales they had a jump in revenue payment to the dealer group). So the pricing mechanism was multifaceted. What they sold at wasn’t a clean equation. Towards this special date of theirs it wasn’t so much about profit but about vehicles sold. Vendors give you the option to chose when you buy from them. Again, that’s worth money.

Deposits On Goods (in some cases)

Sometimes you can legally walk away from a deposit, sometimes you can’t so make sure you have the vendor spell it out to you. I’d never do it personally for ethical reasons unless I’d checked they were ok with it in advance. The option here is to find something the same but far cheaper. This sounds lame but there are actually millions of dollars made and lost on this one alone by the big end of town.

The housing market is a classic example of it. Back in the 80′s and 90′s the deposit on a property bought of the plan was a cheap upside option on house prices. Developers didn’t always document the transaction as a full sale with delayed payments but instead they just asked for a forfeitable deposit of say 5% that you could walk away from. This doesn’t happen as much these days, but there are still anomalies even though more complex. The developers didn’t realise they were ‘writing’ call options on property prices extremely cheaply. Property markets were moving 10-30% per annum.

Some smart cookies ran around buying 5% options and just sat on them waiting for prices to go up. The downside was 5% and the upside was, well lets call it, the Moet outcome. The kicker was not having to fund the full price of property if they invested the traditional way. Some made fortunes. I was only a kid then

Decisions With Financial Impact

There are dozens of these, too many trade secrets I’m sorry, become a Saasu.com customer and I’ll reveal some One example is the right of Company Management to decide if a company wants to buy back its own shares from the market. There are multifaceted advantages in this ‘decision option’. Accordingly it has value when the circumstances are right.

The Time Extension

When someone is willing to sell you something and leaves a firm price with you for a day then they are giving you the right to accept or decline for 24hrs say. This is an option with very little time value. Accordingly it isn’t worth much. However if you ask for (or are offered) a time extension you are effectively being given money. That time has value. If the market price changes but you can still transact at the offered price per your agreement then you stand to save money or avoid losing money.

Either way you win in this situation so the option had value. I could go on for a while but I’ll save some for another day. If you have any share them and I’ll post and credit them to you next time around.