understanding liability

If the State of California goes bust, we've got more problems than any federal deposit insurance will fix.

Elizabeth Richardson

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Are you saying its pretty safe to have millions of dollars sitting in these funds at Vanguard/Fidelity? It sounds like you regard these funds as having a lower risk than regular bank deposits, and yet these funds tend to have higher returns.

Anoop

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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."

The insurance is to protect investors against the custodian running away with the assets.

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.

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.

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 snipped-for-privacy@sbcglobal.net

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I have read that this is the one scenario in which Vanguard's unique ownership structure (Vanguard's funds basically collectively own Vanguard) is a negative -- because of the structure, Vanguard cannot kick in money to prevent a MMF from breaking a buck.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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Very well said, as so many municipalities are realizing, it's easier and cheaper to publish and stand on their sound financial position than it is to purchase insurance some have called "worthless."

The appraisal and management of so-called "risk" is so awfully, horribly, abysmaly warped these days that municpal tax-free rates are higher than taxable Treasury rates.

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The crisis may in fact be over at this point. Not much discussion has gone on in this forum about the crisis as it was unfolding, and very little appeared in the widely-distributed media PRIOR to the crisis. (A number of non-media papers and analyses were available prior to the crisis (one link to an article written by an official of Fannie Mae was posted in this forum way back in early 2005), but you had to look and dig to find them.)

Mark, I believe a preceding discussion regarding CD's and the FDIC arrived at the determination that CD's held at ONE bank can and should and usually are CD's from OTHER banks, thereby gaining FDIC insurance for each CD - even if the total at one's preferred bank exceeds the

100k limit. I.e. it is not necessary to open separate accounts for CD's. One can also purchase Treasury bills through one's bank.

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Elizabeth I like your style.

As for another opinion on the thread about how to invest a friend's $500,000, I can't remember how many times the OP mentioned that they wanted no risk, but it was a bunch. So I vote for CDs.

(Personally I would not put $500,000 in CDs, but my job is to help the client handle his/her money the way he/she wishes, which is not necessarily what I would do. This OP was very clear in what he wanted.)

-HW "Skip" Weldon Columbia, SC

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Really? I don't think so, at least not for Vanguard. I think this insurance is for funds in *brokerage* accounts.

I don't think so. Rather, I think that each individual mutual fund is a separate corporation, so there are firewalls between the organization that manages the fund and the fund's assets itself.

Yes indeed.

What's your risk profile?

For example, right now Vanguard's short-term investment-grade bond fund is yielding 4.17% and their treasury bond fund is yielding 2.33%. So at some point you need to decide whether the extra return is worth the extra risk.

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I think you are mixing two issues here. Safe from what? Bank bankruptcy or market fluctuations?

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Both. It sounds like Elizabeth is saying that market fluctuations is not an issue (since it's a MMF and CA won't go bust). That leaves the bankruptcy issue of the bank. I thought SIPC covers that to 500K. Is my assumption correct?

Anoop

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I'm saying that there is no insurance will protect you financially if California goes bust. The effect such an occurence would have on the economy of not just the US, but the entire world, would be catastrophic. There isn't any insurance that protects you from making poor investments. FDIC insurance does provide insurance in the case of a bank failure.

Elizabeth Richardson

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I'm not sure whether I buy the argument that the crisis is over. Some of the blogs I read say there's more to come (like Mish's blog). In general, until employment starts picking up, I don't think we will have seen the end of this crisis (hence my conservative stance to investing at this time). The fed may have to bail a few more banks out.

Anoop

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The unemployment rate is lower than any time during the 25 year period of

1972 - 1996, or the last full year of the Nixon administration, all of the Ford, Carter, Reagan, Bush I administrations, and the first 4 years of the Clinton administration. See: Somehow it has gotten around that we have a crisis regarding employment. Not so. Is the economy dandy? Well there are a few institutions who didn't understand, apparently, mortgage lending and got themselves into trouble. People were eager to buy a house and got in over their heads, because they, too, failed to properly understand mortgage lending.

The economy doesn't always move in one direction. This, too, shall pass.

Elizabeth Richardson

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