Not All Cash Balances Are Created Equal
By Jason@vigilarewealth.com on November 10, 2011 in Investor Lounge
A Brief Note on Cash Balances
We continue to be very concerned with the developments of the European sovereign debt crisis and its effect on the markets. One of our responses has been to limit our exposure to non-FDIC insured cash and money-market balances in our client accounts. FDIC coverage is not to be confused with SIPC. The Securities Investor Protection Corporation does not offer to investors the same blanket protection that the Federal Deposit Insurance Corporation provides to bank depositors.1
Fortunately, our custodian offers $500,000 in FDIC coverage per individual based on its dual bank structure.2 Additionally, we have made purchases of T-bills at this week’s U.S. Treasury auction to provide additional safety on larger cash balances.3
This shuffling of cash is not intended to generate a greater return. The returns on most cash and equivalent investments are close to zero (Thank you Mr. Bernanke). The real reason is to protect our clients from a potential freeze in the $2.6 trillion money-markets. We believe that our extra caution is warranted; there was one prominent money-market that “broke the buck” following the Lehman Brothers collapse in 2008.4 As of this September, the top ten U.S. money-market funds had approximately 38% exposure to the European region.5
There are plenty of risks in the market today, but we should at least be compensated for taking them.
The Vigilare Management Team
1Balances in a TD Ameritrade FDIC Insured Deposit Account are held at TD Bank, N.A. and TD Bank USA, N.A., or both, where they are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per bank. Because there are two banks in the IDA program, IDA balances could be covered for up to $500,000 per depositor. TD Bank N.A. and TD Bank USA, N.A. are affiliates of TD Ameritrade.
2Source SIPC
3From FDIC web site: Even though Treasury securities are not covered by federal deposit insurance, payments of interest and principal (including redemption proceeds) on those securities that are deposited to an investor’s deposit account at an insured depository institution ARE covered by FDIC insurance up to the $250,000 limit. And even though there is no federal insurance on Treasury securities, they are backed by the full faith and credit of the United States Government – the strongest guarantee you can get.
4See Reserve Primary Fund
5Source Fitch & WSJ