Is Your Money Market Safe?
Did you know that you Money Market Account could have sub-prime mortgage exposure and thus you could your principle? Did you know that they are also not FDIC insured? Its true, MMA’s invest in RMBS (Real estate Mortgage-Backed Securities) and other SIVs (Structured Investment Vehicles). Both RBMS and SIVs can be used to invest in sub-prime or alt-A mortgages, both of which are a risky proposition right now. Maybe even prime mortgages are risky too. With such lax underwriting standards the past few years, it really isn’t a surprise that there are so many defaults occurring.
Another thing to consider is that MMAs are not covered by FDIC.
The fact that FDIC may not even have enough money to pay out all the investors if several banks go under is a separate discussion.
Also, stay away from savings accounts with banks that have significant mortgage exposure. If you have less than the FDIC limit of $100,000 you’ll get your money back, eventually, but its still a hassle.
Banks like Countrywide, which is facing HUGE mortgage-related losses, could fold and unnecessarily tie up your money for several months. Much better to spread your risk around.
I do not have a money market account. And I have my savings spread out between Bank of America, ING Direct, Commerce Bank and Capital One Bank. Maybe I’m being paranoid, but based on the impossible black-swan events that keep occuring in the financial markets, I’d rather be safe than sorry.
In fact, I think keep my cash in a brokerage account with no exposure to mortgage-backed securities may not be a bad idea. Most brokerages are covered by SIPC rules which extend to $500,000. And buying Treasuries, Munis or even Senior Income Trusts like VVR may not be a bad idea!
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November 4th, 2007 at 12:59 pm
The mandated bank reserves and bank-to-bank loan insure that all the banks walk at the ame speed down the hill toward the edge holding hands together. If one falls/fails, many will follow.
Is FDIC insurance per person or per account? My understanding, which might not be correct, is that if all four banks (Bank of America, ING Direct, Commerce Bank and Capital One Bank) tank, you will still get only money up to the FDIC limit. (basically no safety gained by spreading out). Perhaps you could double your “FDIC safety” by changing/adding account types to include a significant other (provided that he and/or she are under FDIC limit).
November 4th, 2007 at 7:50 pm
FDIC is insured per account. (providing you have different ownerships on accounts, like joint ownership or corporate entities)
However, they only have enough reserves to cover 4% of all deposits. So as long you less than 4% of banks fail, you’ll get your money back.
November 5th, 2007 at 8:58 am
Do a search and read the particulars – don’t rely on
someone’s posting – including this one.
The depositor is insured for $100k per “member” institution, not per account within one “member” institution, and not at all in non-member
institutions with some exceptions. Although I don’t understand all the particulars, I do know the
insurance is not “per account” as stated above.
This is confirmed by just one excerpt from one
online source quoted below. We should do
our own research to understand the details, and we
need to understand how rules have been changed and
what changes have been proposed.
excerpt from one search result -
FDIC insurance covers “deposit accounts”:
Demand deposit accounts (aka “checking accounts”), Negotiable Order of Withdrawal accounts, i.e., NOW accounts (checking accounts that earn interest), and money market deposit accounts, also called MMDAs (savings accounts that allow a limited number of checks to be written each month.)
Savings accounts that can be added to or withdrawn from at any time.
“Money market” accounts, essentially high-interest savings accounts (the name is similar to “money market funds” which are not insured).
Certificates of deposit (CDs), which generally require funds to be kept in the account for a set period.
Outstanding Cashier’s Checks, Interest Checks, and other negotiable instruments drawn on the accounts of the bank.
Accounts at different banks are insured separately. One person could keep $100,000 in accounts at two separate banks and be insured for a total of $200,000. Also, accounts in different ownerships (such as beneficial ownership, trusts, and joint accounts) can be considered separately for the $100,000 insurance limit. The Federal Deposit Insurance Reform Act raised the amount of insurance for an Individual Retirement Account to $250,000.
November 11th, 2007 at 11:33 pm
[...] Is Your Money Market Safe? by Living off Dividends [...]
November 12th, 2007 at 11:31 am
Money market deposit accounts (MMDAs) are in fact FDIC insured. It says this in the very fdic.gov link you posted.
Money market mutual funds (MMMFs) are something else entirely, and are not FDIC insured. They are, however, highly regulated, and no one has ever lost money in one.
Also, ING Direct is a MMDA.
November 16th, 2007 at 6:23 pm
Actually, it doesn’t cover money market _funds_–which are different from money market _accounts_.
It’s easy to get them confused, I did until I had to memorize them for a personal finance test. 
The FDIC site you link to says it right near the top:
“…Banks also may offer what is called a money market deposit account, which earns interest at a rate set by the bank and usually limits the customer to a certain number of transactions within a stated time period. All of these types of accounts generally are insured by the FDIC up to the legal limit of $100,000 and sometimes even more for special kinds of accounts or ownership categories.”
What you say is quite applicable to funds, however. FDIC doesn’t cover them, though there are some safeguards if the company offering them totally collapses, I believe. It’s another organization that does it, something with “S” and “P” in its acronym.
November 27th, 2007 at 1:53 pm
Anon – the whole point of this article is that there have been some losses in some money market funds in recent months…