Lack of FDIC Insurance a big deal?

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Marketgarden
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Lack of FDIC Insurance a big deal?

Post by Marketgarden »

Hey guys,
I'm strongly considering closing my Ally account and moving my cash to a Vanguard Prime money market. This would be used as my EF, vacation fund, house DP, ect. This seems ideal because it has a higher yield and it would be one less account to deal with. The only thing that keeps bothering me is the lack of FDIC insurance. After doing a lot of research here and other places, I still can't decide if this is a significant risk. I know there are have only been a couple issues in history where a money market has been at risk, but it does give me pause. Just wanted to hear your collective thoughts on the subject. Thanks!
onourway
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Re: Lack of FDIC Insurance a big deal?

Post by onourway »

Would I put every penny I had in a single money market fund? Nope, but I'm fine with my emergency fund/short-term savings being there. In the worst case scenario we still have several other layers of fall-back - ~1-2 months expenses typically in checking accounts, 2 stable jobs, taxable investment accounts, Roth contributions, etc. etc. etc.
livesoft
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Re: Lack of FDIC Insurance a big deal?

Post by livesoft »

I am OK with Vanguard Prime Money Market, but not necessarily with MM funds from other vendors. Furthermore, I am suspicious of other vendors who might use 1-3 month T-bills for their MM funds nowadays, but might switch to something else to bail out another part of the company in a crisis.

But at the present time we have less than $3 combined in any money market fund at any vendor and no money in CDs nor savings accounts. We did start at Vanguard in the very early 1980s by using the Prime MMF.
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EyeDee
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Availablity

Post by EyeDee »

.
I believe there has been posts about Vanguard accounts being unavailable for several weeks while getting straight situations where Vanguard has discovered possible access to an account by someone other than an account owner, so one should probably always keep enough in non-Vanguard accounts to handle situations where it takes several months for any problems accessing Vanguard to be straightened out. This would be in addition to FDIC considerations.
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goingup
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Re: Lack of FDIC Insurance a big deal?

Post by goingup »

Never have given it a thought at Vanguard. They have never "broken the buck". I have never had a high yield bank account, preferring the simplicity of using MM fund instead.
alex_686
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Re: Lack of FDIC Insurance a big deal?

Post by alex_686 »

In 40 years, IIRC, only 3 money market funds have broken the buck. Money was tied up for a few weeks as everything got figured out, everybody was paid 97+ cents on the dollar.
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JoMoney
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Re: Lack of FDIC Insurance a big deal?

Post by JoMoney »

alex_686 wrote: Wed Apr 18, 2018 2:04 pm In 40 years, IIRC, only 3 money market funds have broken the buck. Money was tied up for a few weeks as everything got figured out, everybody was paid 97+ cents on the dollar.
With regard to the "Reserve Primary Fund", some of the money was released after "a few weeks" some of the money was tied up/frozen for years, the whole ordeal was likely a big nuisance (at a minimum) for those who went through it.
http://www.primary-yieldplus-inliquidat ... pdate.html
http://www.primary-yieldplus-inliquidat ... chive.html

There wasn't a loss or even hiccups in money being available to people under FDIC coverage in bank accounts.

I'm not saying a money market fund isn't a good option for some purposes, but one should keep in mind that there has been times in the not too distant past where it has made a difference.
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Svensk Anga
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Re: Lack of FDIC Insurance a big deal?

Post by Svensk Anga »

Bear in mind that due to Vanguard's cost advantage, they can buy higher rated debt than most and still offer a competitive yield. This makes it less likely that VG would break the buck compared to the average or especially versus high cost funds. Maybe you should dig into a list of holdings to see if this holds up as your due diligence.
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Miriam2
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Re: Lack of FDIC Insurance a big deal?

Post by Miriam2 »

Marketgarden wrote: I'm strongly considering closing my Ally account and moving my cash to a Vanguard Prime money market. . . . The only thing that keeps bothering me is the lack of FDIC insurance. After doing a lot of research here and other places, I still can't decide if this is a significant risk. I know there are have only been a couple issues in history where a money market has been at risk, but it does give me pause. Just wanted to hear your collective thoughts on the subject.
I don't think you have to worry Marketgarden. I'm no expert, but I owned the Reserve Primary money market fund when it broke the buck, so I've read everything I could on the debacle :annoyed After the SEC froze the Reserve Fund on Sept. 16, 2008, it took us until 2016 to receive our last distribution from the fund, which we owned as a simple money market fund at TD Ameritrade. I described the ordeal here

However, here are some short articles that explain what happened with the Reserve Fund and why it probably would not happen with money market funds from large reputable institutional mutual fund companies like Vanguard, Fidelity, T. Rowe Price, etc.

This article "The SEC Sues the Principals of the Reserve Primary Fund" from May 2009, explains in a nutshell how the Reserve Fund broke the buck.
The complaint . . . claims that the defendants [the Reserve Company and its principals] failed to provide key material information to Primary Fund's investors, board and rating agencies after the bankruptcy of Lehman Brothers on September 15. . . . At the time Lehman filed for bankruptcy, the Fund held $785 million in Lehman Debt securities. Over the previous two years the fund had taken increasingly risky positions in commercial paper issued by financial institutions including Lehman. . . . This strategy resulted in higher yields. At the same time, the positions carried more risk, particularly for the Fund which, unlike many money market funds, was not owned or affiliated with a large public company or commercial bank that had the resources to provide financial support in the event a portfolio security became impaired. Moodys warned the Fund about this fact in July 2008 to no avail.

In the weeks prior to Lehman's bankruptcy, concerns were raised about the Lehman debt held by the [Reserve] Fund. Nevertheless, the Fund continued to hold Lehman paper.

In an effort to reassure investors, the Fund's Board of Trustees and the rating agencies, and to avoid breaking the buck, defendants [the Reserve Company] made a series of false and misleading statements including claims that . . . the Fund was liquid and honoring redemption requests.

As a result of these misrepresentations . . . the NAV was flawed. This advantaged some investors and disadvantaged others. By the end of the day, on September 16 the Fund was forced to disclose that it had broken the buck.

In other words, the Reserve Company had been buying risky commercial paper from the risky Lehman Brothers for two years, Moodys had warned the Reserve of this months before the breaking of the buck and others had warned the Reserve weeks prior to the break - BUT the Reserve continued to hold the very risky Lehman paper, then the Reserve made a series of serious misleading/criminal statements to reassure everyone everything was fine - and then the dam burst AND since the Reserve was not a large company with the resources to provide financial support to the fund - they couldn't plug the dam.

This article "Money Market Breaks the Buck, Freezes Redemptions" also explains what happened and has a quote from Vanguard:

Money market funds pride themselves on their liquidity and the safety of their investments. All money market shares are priced at $1 -- a figure so important to the industry that fund companies take losses to keep the share price from dipping below $1, which is known as breaking the buck.

"They [the Reserve Company funds] didn't just break the buck, they shattered it," said Don Phillips, managing director at investment research firm Morningstar Inc., about The Reserve fund.

This is only the second time that a money market fund's net asset value has dipped below $1. In 1994, Denver-based Community Bankers U.S. Government Money Market Fund returned 96 cents on the dollar to investors when bad derivatives investments forced it to liquidate.

Phillips said the fact that The Reserve had to break the buck reflects the seriousness of its troubles. "People say that if you break the buck on a money market fund you're saying that you don't want to be in the money market business anymore."

Phillips speculated that because The Reserve is solely a money market shop, it didn't have the resources to bail out Primary Fund in the way a diversified mutual-fund giant such as Fidelity Investments, Vanguard Group or Evergreen Investments, which is owned by Wachovia Corp. would be able.
. . . . . .

Vanguard Group also issued a statement reaffirming the integrity of its money funds.

"We are confident in the stability of Vanguard's money market funds," spokesman John Woerth said in an email. "Our largest money market fund is Vanguard Prime Money Market Fund VMRXX, VMMXX, which currently holds more than half of its assets in Treasury and agency securities. In addition, Prime Money Market Fund and our other money market funds have no exposure to money market instruments issued by securities dealers, including distressed issuers like Lehman and AIG."

So, I'm not sure the lack of FDIC Insurance is a big deal for investors who hold large institutional money market funds at reputable firms like Vanguard, Fidelity, T. Rowe Price, etc, especially with the new money market regulations that were passed after the Reserve Funds debacle.
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Pajamas
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Re: Lack of FDIC Insurance a big deal?

Post by Pajamas »

I think there have been other money market funds which technically broke the buck but the sponsor bailed them out. The ones that shortchanged investors were ones where the firms themselves were not able to support the fund when it got into trouble. I guess there is no guarantee that a company would choose to do so in the future, but that's always been the case in the past, as far as I know.
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Re: Lack of FDIC Insurance a big deal?

Post by SeeMoe »

Vanguard Prime MM fund is my main short term holding product and it doesn’t even occur to me that it could be a problem anymore than our various stock index funds or bond funds, to include the excellent high yield bond fund. What’s to worry about,.....?

SeeMoe.. :shock:
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Re: Lack of FDIC Insurance a big deal?

Post by Spirit Rider »

livesoft wrote: Wed Apr 18, 2018 1:47 pm I am OK with Vanguard Prime Money Market, but not necessarily with MM funds from other vendors. Furthermore, I am suspicious of other vendors who might use 1-3 month T-bills for their MM funds nowadays, but might switch to something else to bail out another part of the company in a crisis.
Huh??? Vanguard holds 40% Yankee/Foreign CDs/Bonds, 30% T-bills, 20% CDs.

Why would you be suspicious of using 1-3 month T-bills for a money market fund. I can't think of a safer MMF than one that exclusively used such instruments. Would you rather they used commercial paper like the Reserve Fund?
alex_686
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Re: Lack of FDIC Insurance a big deal?

Post by alex_686 »

livesoft wrote: Wed Apr 18, 2018 1:47 pm I am OK with Vanguard Prime Money Market, but not necessarily with MM funds from other vendors. Furthermore, I am suspicious of other vendors who might use 1-3 month T-bills for their MM funds nowadays, but might switch to something else to bail out another part of the company in a crisis.
No, probably not. The rules on self dealing and pretty strict. There are some weird edge case scenarios where a MMF would end up with debt from another part of the fund family, but these are very much the exception to the rule.

The last time I can think of this happening was when the sponsor, a bank, bought out a failed bank via the FDIC where the MMF already held the failed bank's paper.
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Re: Lack of FDIC Insurance a big deal?

Post by whodidntante »

The main risk with Vanguard is the "individual risk" of account servicing brought about by Vanguard's intractably dubious IT infrastructure and accounting. Or did I dream reading about that? Anyway, the fund I have much more confidence in. Commercial paper, T-bills, CDs and the like are very safe and you probably won't lose money.
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Re: Lack of FDIC Insurance a big deal?

Post by livesoft »

Spirit Rider wrote: Wed Apr 18, 2018 8:04 pmWhy would you be suspicious of using 1-3 month T-bills for a money market fund. I can't think of a safer MMF than one that exclusively used such instruments. Would you rather they used commercial paper like the Reserve Fund?
I guess I wasn't too clear. I am concerned about bait-and-switch. T-bills are the bait. The switch would be use commercial paper like the Reserve Fund.

I had a fund that was "government securities" that switched to a big percentage of Countrywide debt.
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Re: Lack of FDIC Insurance a big deal?

Post by nisiprius »

It's not totally meaningless.

As far as I know, to date, there has been exactly one money market mutual fund that has ever collapsed, and oddly enough it was the grandaddy of them all, the Reserve Primary Money Market Fund. The final outcome was that all of the fund's investors eventually got almost all of their money back, more than $0.99 on the dollar I think, but it took more than two years and a long-strung-out process, and they were denied access to any of their money for something like six months. And of course didn't earn any interest on it.

In contrast, I personally had money in an FCUA-insured credit union, and a work colleague of mine had money in a major regional bank with FDIC insurance, which failed during the S&L crisis, and in both cases it was a total non-event and not even a minor nuisance for depositors. The name over the door and on the statements changed, period. That was literally all. In my case, the acquiring bank kept the same employees, and my CDs kept the same interest rates etc.

There is a fundamental issue here. Money market mutual funds are actually a sneaky thing in that they provide what is essentially a banking service, without being subject to bank regulation. You are relying on the prudence, integrity, and financial soundness of the fund company to a degree that you are not with a bank. There is no backstop. There isn't the solid backstop of FDIC, there isn't the "safety net" of state guaranty associations for insurance, and, no, the SIPC plays no role in protecting you from problems within any mutual fund. Now, in fact, money market mutual funds have traditionally been managed properly since they were invented in the seventies, and thus have been safe, with the one single exception of the Reserve Primary fund. But that was quite a big exception.
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Re: Lack of FDIC Insurance a big deal?

Post by Dandy »

Loss of FDIC insurance isn't the only difference. My understanding is that Prime and other institutional type money markets have options to charge fees, or restrict withdrawals in certain situations related to economic hardships that may cause a run on the fund for example.

That isn't the case with the retail money market such as Federal Money Market which is also the clearing account. Still no guarantee that it couldn't break the buck but no provision for charging fees or restriction on withdrawals.

So, Prime might be a bit of an issue in certain, hopefully very rare circumstances, so maybe you don't want all your cash allocation in it. It is during those rare circumstances that you often want to access your cash, maybe all your cash.
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Re: Lack of FDIC Insurance a big deal?

Post by rob65 »

From the prospectus for prime money market:

“You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.”

For federal money market:

“You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.”

Likely? No. Possible? Yes. The lesson of 2008 is that stuff happens. The next crisis could be different from the last one. Believe the prospectus. IMHO, a short term emergency fund should be kept in an FDIC or NCUA insured account.
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Re: Lack of FDIC Insurance a big deal?

Post by welderwannabe »

I moved my short term savings to vanguard municipal money market 2 weeks ago...but my tax rate is atrocious this year so it made a lot of sense for me.

I keep 6 weeks of expenses in an Ally money market in case Vanguard has technical problems.
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Re: Lack of FDIC Insurance a big deal?

Post by am »

rob65 wrote: Thu Apr 19, 2018 7:40 am From the prospectus for prime money market:

“You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.”

For federal money market:

“You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.”

Likely? No. Possible? Yes. The lesson of 2008 is that stuff happens. The next crisis could be different from the last one. Believe the prospectus. IMHO, a short term emergency fund should be kept in an FDIC or NCUA insured account.

Agree, but what kinds of trouble are we dealing with at worst? Loss of a few cents on the dollar or a temporary freeze on withdrawals in a vanguard mm? It didn’t happen during the crisis of 2008.
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Re: Lack of FDIC Insurance a big deal?

Post by garlandwhizzer »

Lack of FDIC Insurance a big deal? IMO, no, but that's just my opinion. The financial collapse of 2007-9 was the worst financial event since the Great Depression and the Prime MMF did not break the buck. That's good enough for me. If such a massive black swan event does occur in the future, bigger than 2007-9, a modest breaking of the buck will be the least of your worries.

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Re: Lack of FDIC Insurance a big deal?

Post by am »

Did mm accounts exist during the Great Depression? If so, what happened?
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Re: Lack of FDIC Insurance a big deal?

Post by JoMoney »

am wrote: Thu Apr 19, 2018 1:10 pm Did mm accounts exist during the Great Depression? If so, what happened?
No... and there is a difference between a money market "account" and a money market "fund".
A mm "account" is more likely to be at a bank, and be FDIC insured.
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Re: Lack of FDIC Insurance a big deal?

Post by aristotelian »

I recently moved my emergency funds to Vanguard Prime MM, mostly to avoid the inconvenience of a separate savings account. I am gainfully employed so I do not have a huge emergency fund. For me, a couple months expenses is enough to keep in cash and I do not worry too much about "breaking the buck" or FDIC. If I had $100K or more in cash, I would probably want FDIC insurance, maybe go through the trouble of a CD ladder, etc.
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Re: Lack of FDIC Insurance a big deal?

Post by patrick »

Popular Direct now has an FDIC insured savings account yielding 2%. Why settle for 1.8% uninsured when you can get 2.0% insured?
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Re: Lack of FDIC Insurance a big deal?

Post by am »

patrick wrote: Thu Apr 19, 2018 7:24 pm Popular Direct now has an FDIC insured savings account yielding 2%. Why settle for 1.8% uninsured when you can get 2.0% insured?
If your at 32% bracket muni mm.yields 1.5% which is 2.5% or so tax equivalent when you count fed + state + investment tax.
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Re: Lack of FDIC Insurance a big deal?

Post by J295 »

Money markets don't concern me.
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Re: Lack of FDIC Insurance a big deal?

Post by golfCaddy »

Here's a fed report: https://www.newyorkfed.org/medialibrary ... /sr564.pdf. There were other MMFs which suffered losses, but they were bailed out in some form or fashion by their fund sponsors.
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Re: Lack of FDIC Insurance a big deal?

Post by am »

I wonder if it’s better to be backed by vanguard/fidelity or fed gov/fdic during next crisis?
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Re: Lack of FDIC Insurance a big deal?

Post by JoMoney »

patrick wrote: Thu Apr 19, 2018 7:24 pm Popular Direct now has an FDIC insured savings account yielding 2%. Why settle for 1.8% uninsured when you can get 2.0% insured?
Can't tell if that was rhetorical.... I'm settling for 1.5%/1.6%, and I justify it because I don't want the hassle of yet another account, tax form, etc.. cash makes up a very small portion of my overall portfolio and I enjoy being able to keep it at the bank and broker that I use for 95%+ of my finances. Maybe if the difference was a few percent more, or I kept a larger cash balance, but for now I'll accept the difference as a convenience 'opportunity cost'.
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Re: Lack of FDIC Insurance a big deal?

Post by JoMoney »

am wrote: Thu Apr 19, 2018 7:54 pm I wonder if it’s better to be backed by vanguard/fidelity or fed gov/fdic during next crisis?
The assets aren't really 'backed' by Vanguard. Vanguard just manages the assets that stand for themselves, are held in custody by another party/bank, and have a third party accounting firm audit. If the assets fall in value, Vanguard doesn't 'back' it.
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Re: Lack of FDIC Insurance a big deal?

Post by am »

JoMoney wrote: Thu Apr 19, 2018 7:59 pm
am wrote: Thu Apr 19, 2018 7:54 pm I wonder if it’s better to be backed by vanguard/fidelity or fed gov/fdic during next crisis?
The assets aren't really 'backed' by Vanguard. Vanguard just manages the assets that stand for themselves, are held in custody by another party/bank, and have a third party accounting firm audit. If the assets fall in value, Vanguard doesn't 'back' it.
Vanguard backs it in a sense that their money would prevent the fund from breaking the buck.
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Re: Lack of FDIC Insurance a big deal?

Post by randomizer »

I wouldn't do it, but that's mostly because my emergency fund is too large for me to feel comfortable with the idea of going without FDIC insurance. Otherwise, I love simplicity and the idea of having fewer accounts.
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Re: Lack of FDIC Insurance a big deal?

Post by nisiprius »

Image

Briefly: In ye olde days, meaning in between about 1952 to 1973, inflation was low. Since the Depression, banks had been tightly regulated. One issue was that banks borrowed short (paying interest on bank accounts) and loaned long (30-year fixed-rate mortgages). That was an intrinsically risky situation and to protect the system, among other things, "regulation Q" put a cap on how much interest banks could pay on bank accounts. At one point, IIRC, the cap was 5-1/2% for commercial banks, 5-3/4% for S&L's, and 6% for credit unions. Unable to compete on interest rates, banks competed on account-opening gifts, and bank lobbies were crowded with huge pyramid-like piles of bathroom scales (at the bottom), clock-radios (in the middle), and color TV sets (at the apex), which you could get by opening a new account.

As inflation started to take off, regulation Q really started to hurt.

Money market mutual funds, introduced in 1971, made an end-run around banking regulations, and for a while, when money market mutual funds were paying 10% and bank accounts were still capped at 5-1/2%, they were pretty exciting products.

Eventually, inflation and money market funds led to the end of regulation Q.

One of the intermediate points was the creation of the confusingly and misleadingly named bank accounts, "money market deposit accounts." They were not in any sense money market mutual funds, the only thing money-marketish about them was they were allowed to pay higher interest in order to compete with money market mutual funds.
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Re: Lack of FDIC Insurance a big deal?

Post by neurosphere »

nisiprius wrote: Thu Apr 19, 2018 9:21 pm That was an intrinsically risky situation and to protect the system, among other regulations, "regulation Q" put a cap on how much interest banks could pay. At one point, IIRC, the cap was 5-1/2% for commercial banks, 5-3/4% for S&L's, and 6% for credit unions. Unable to compete on interest rates, banks competed on account-opening gifts, and bank lobbies were crowded with huge pyramid-like piles of bathroom scales (at the bottom), clock-radios (in the middle), and color TV sets (at the apex), which you could get by opening a new account....
Wow. Regulation Q is by far the most interesting thing I have learned today:
https://en.wikipedia.org/wiki/Regulation_Q

Not the most USEFUL (I've been studying and reviewing medicine all day today), but certainly the most interesting and something which I'm sure to dig up at cocktail parties in the future!

NS

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Re: Lack of FDIC Insurance a big deal?

Post by Northern Flicker »

Your first concern should be the new SEC liquidity rules, that include:
Liquidity Fees
Under the rules, if a money market fund’s level of “weekly liquid assets” falls below 30 percent of its total assets (the regulatory minimum), the money market fund’s board would be allowed to impose a liquidity fee of up to two percent on all redemptions.  Such a fee could be imposed only if the money market fund’s board of directors determines that such a fee is in the best interests of the fund.  If a money market fund’s level of weekly liquid assets falls below 10 percent, the money market fund would be required to impose a liquidity fee of one percent on all redemptions.  However, such a fee would not be imposed if the fund’s board of directors determines that such a fee is not in the best interests of the fund or that a lower or higher (up to two percent) liquidity fee is in the best interests of the fund.  Weekly liquid assets generally include cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, and securities that convert into cash within one week.

Redemption Gates
Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate).  To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests.  A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier.  Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period.
From: https://www.sec.gov/news/press-release/2014-143

My understanding is that the Federal MMF is exempt from the rules. The Federal MMF and the Treasury MMF are managed to avoid the above liquidity issues but the Treasury MMF has a $50K minimum.
Last edited by Northern Flicker on Fri Apr 20, 2018 12:32 am, edited 1 time in total.
alex_686
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Re: Lack of FDIC Insurance a big deal?

Post by alex_686 »

am wrote: Thu Apr 19, 2018 8:01 pm
JoMoney wrote: Thu Apr 19, 2018 7:59 pm
am wrote: Thu Apr 19, 2018 7:54 pm I wonder if it’s better to be backed by vanguard/fidelity or fed gov/fdic during next crisis?
The assets aren't really 'backed' by Vanguard. Vanguard just manages the assets that stand for themselves, are held in custody by another party/bank, and have a third party accounting firm audit. If the assets fall in value, Vanguard doesn't 'back' it.
Vanguard backs it in a sense that their money would prevent the fund from breaking the buck.
And how would that work?

In a for profit structure the parent company could buy new shares by dipping into the cash pool of the parent. They might be willing to buy a $.97 share for a $1.00, losing $.03. MMF are loss leaders.

For Vanguard, there is no parent company. The funds own each other. As such, in order to advantage one fund they would have to disadvantaged another fund.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
alex_686
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Re: Lack of FDIC Insurance a big deal?

Post by alex_686 »

am wrote: Thu Apr 19, 2018 1:10 pm Did mm accounts exist during the Great Depression? If so, what happened?
No. Mutual funds as we know them did not exist until the 1940s. Before then they were more like closed end trusts. Nisiprius does a great job on explaining why MMF became popular.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
patrick
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Location: Mega-City One

Re: Lack of FDIC Insurance a big deal?

Post by patrick »

nisiprius wrote: Thu Apr 19, 2018 9:21 pm At one point, IIRC, the cap was 5-1/2% for commercial banks, 5-3/4% for S&L's, and 6% for credit unions. Unable to compete on interest rates, banks competed on account-opening gifts, and bank lobbies were crowded with huge pyramid-like piles of bathroom scales (at the bottom), clock-radios (in the middle), and color TV sets (at the apex), which you could get by opening a new account.
The strange thing is that today we have no cap on allowed interest rates and actual rates offered are often below 0.1%, yet the banks are still handing out big signup bonuses, not in the form of TVs but rather with hundreds of dollars in cash!
Valuethinker
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Re: Lack of FDIC Insurance a big deal?

Post by Valuethinker »

Marketgarden wrote: Wed Apr 18, 2018 1:29 pm Hey guys,
I'm strongly considering closing my Ally account and moving my cash to a Vanguard Prime money market. This would be used as my EF, vacation fund, house DP, ect. This seems ideal because it has a higher yield and it would be one less account to deal with. The only thing that keeps bothering me is the lack of FDIC insurance. After doing a lot of research here and other places, I still can't decide if this is a significant risk. I know there are have only been a couple issues in history where a money market has been at risk, but it does give me pause. Just wanted to hear your collective thoughts on the subject. Thanks!
If the loss or freezing of money is material to you, you probably should not do it.

Keep your money in an FDIC insured institution at below $250k.

I happen to believe Vanguard Prime Money Market is the safest thing around in that category (or as good as). However there are very extreme situations where Money Market Funds could, again, get into trouble.

BTW have you checked credit rating of Ally Bank? Looks like it is BB+ ? Depends on which security. But that is "highly speculative".

https://www.standardandpoors.com/en_US/ ... eId/504352
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