Is My Money Safe?

A reader asks:

If a brokerage fails, what happens to a customer’s holdings there?

Another reader asks:

My wife and I have the bulk of our investments (401k & trading) in basically 2 accounts. Is this a dumb practice? Should we be more ‘diversified’ with our institutions? We’ve been discussing this for a while, and then with SVB, it’s definitely brought the discussion back to the kitchen table. Understood that FDIC insures up to $250k, but once you get north of that, any best practices for what to do?

Still another reader wants to know:

The Federal Home Loan Bank (FHLB) of San Francisco has a lot of exposure to SVB and other similar banks based on public SEC filings ($30 billion to $50 billion by my count). My money market fund had approximately 20% of its holdings in FHLB securities as of February 28th. Should I be concerned? I understand FHLB is a GSE, just like Fannie and Freddie who I’m sure you remember from the GFC. The second largest bank failure in US history is enough of a low probability event for me – just want your thoughts on if I should be concerned with other low probability events like something non-crypto breaking the buck because of SVB?

Here’s one more:

I’m considering keeping our emergency fund in a money market fund. Is this too risky with out it having FDIC insurance?

You get the idea.

There were a lot of questions like that this week.

People are worried about the safety of their money and it’s not something they ever really thought they would have to worry about.

Carl Richards once wrote, “Risk is what’s left over after you think you’ve thought of everything.”

The true risks are never really known ahead of time.

No one had a bank run as the biggest risk to the financial system in their 2023 outlooks. A Wall Street strategist writes an annual outlook and God laughs.

There are plenty of known risks when you invest — inflation, deflation, recessions, rising interest rates, falling interest rates, bear markets, crashes, losses, etc.

No one can predict these things in advance but this is what you sign up for when putting your money to work in risk assets.

When you sign up for a bank account you’re not planning on taking any risk. This is why bank accounts don’t pay nearly as much as stocks or bonds. In fact, most bank accounts don’t pay you anything.

No one really worries about the money they have in the bank. And while plenty of investors worry about the performance of their portfolio, few people ever worry about the financial institutions that custody their assets.

The finance industry likes to quantify risks through measures such as standard deviation, tracking error, alpha, risk-adjusted returns and various ratios.

Most normal people care more about qualitative risks that aren’t easy to quantify:

  • Am I going to be OK?
  • Do I have enough money saved?
  • Will I outlive my money in retirement?
  • Can I reach my financial goals?
  • Is my money safe?

That last question is getting a lot of play this week.

The good news is no depositor has lost money in an FDIC-insured bank since 1933 (before the current protections were put in place).

And no depositors over the FDIC limit lost any money this time around either. This is from the Fed’s announcement on what happened after SVB went under:

Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.

We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.

Your money still seems pretty safe in a bank.

The hard part about these kinds of questions is that you have the official rules and regulations and then there are the unspoken rules and regulations.

It reminds me of the scene in A Few Good Men when Lt. Daniel Kaffee mops the floor with Capt. Jack Ross examining a witness using the marine handbook:

There is no rule in place that says bank deposits above $250,000 are covered by the FDIC just like there was no code red in the marine handbook.

I don’t know if that guarantees all deposits but the precedent has been set.

There is no FDIC insurance on a money market fund so I can’t make any promises there either. However, there is nearly $5 trillion in these funds. It’s hard to imagine the Fed wouldn’t step in if there was a run on these funds.1

I guess it depends on how much cash you have on hand and how much you value safety over simplicity.

There are plenty of cash management options available:

  • Money market funds
  • Online savings accounts
  • Treasury bills
  • Savings bonds
  • CDs

Some people might feel more comfortable spreading their cash around.

I do have faith that the Treasury and the Fed and our other regulators are smart enough to know it would be foolish to let the financial system blow up.

However, as last week showed, sometimes things move so fast that something breaks.

I don’t have $250k in cash so these worries are pretty far down the list for my investment plan.

If you’re lucky enough to have more than $250k lying around in cash, maybe you just have to be a little more thoughtful about where you park it if this stuff worries you so much.

Josh Brown joined me on Portfolio Rescue this week to cover all of these questions and more:

Further Reading:
What is the Fed Doing?

1There are also better rules and regulations in place following the 2008 crisis that saw some turmoil in money market funds following the Lehman Brothers blow-up.

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