"anoop" <ghanwani@[EMAIL PROTECTED]
> wrote in message
news:f87bb2d0-1b01-4051-89d0-293378be190a@[EMAIL PROTECTED]
>
> With the Bear Stearns fiasco, no bank seems
> secure. So...
>
> When depositing money with a regular bank that
> has FDIC insurance up to 100K, if the bank declares
> bankruptcy, I assume the account holder loses everything
> above 100K. Is that correct?
That is not correct. Shareholders lose everything, but creditors get to
divide the assets. From the FDIC's FAQ:
"The amount of uninsured deposits they may receive, if any, is based on
the
sale of the failed bank's assets. Depending on the quality and value of
these assets, it may take several years to sell the assets. As assets are
sold, uninsured depositors receive periodic payment on their uninsured
deposit claim."
> Likewise, Fidelity and Vanguard have their own
> "cash reserves" fund. The monies in their accounts
> are insured by the SIPC to 500K (100K for cash
> claims). So I assume that's where the account holder
> goes if Vanguard/Fidelity goes bust.
The insurance is to protect investors against the custodian running away
with the assets.
http://www.sipc.com/how/involved.cfm
Since mutual funds (including money market funds) are separate companies
from the fund management and fund distributor companies (aka fund
families),
the fact that a fund family goes bust has no effect on the fund
(technically
an investment company).
FWIW, money market fund shares are securities, not cash.
> But then, with
> these accounts there's also the added risk that the
> fund share itself lose money because of defaults, right?
> For example, if one has invested in VCTXX, then
> one could lose part of that money if the state of
> CA goes bust, right?
Yes, but the industry as a whole has such a strong impetus to prevent
losses
in MMFs (by paying out of their own pockets, if necessary), that the fund
families are virtual insurers of the money market funds.
> What can one do in this
> scenario? Just stick with treasury funds?
Given the level of world-wide faith in the dollar (as suggested by
$1.58/euro), this is a better alternative?
If you have faith in the federal government, and you've got several
hundred
thousand in cash just lying around (a problem we should all have), you can
split your stash of cash into accounts at different banks, each with a
$100K
insurance limit. Note that retirement accounts are protected to $250K.
Mark Freeland
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