Is my Cash Still Safe at my Bank?

An alternative idea that makes the question moot

Ric Edelman: It's Wednesday, April 5th. Happy Passover. Yesterday I said here on the podcast that federal banking regulators have been trying to kill crypto companies by denying them access to banks. The FDIC shut down Silvergate and Signature Banks and Silicon Valley Bank, all of which did a lot of business with crypto companies. And the regulators are trying to tell other banks not to do business with crypto companies. Their efforts so far are failing because crypto is a legitimate industry that's operating - for the most part anyway, legally and profitably.

Why wouldn't a bank want to do business with an industry like this? Just because you don't like crypto, what does that have to do with it? That's like saying you won't let tobacco companies or casinos or gun manufacturers have bank accounts just because you don't like what they do either.

So while the Federal Reserve and FDIC and the OCC have been failing to harm crypto, the one thing they have been able to do is scare the heck out of ordinary bank depositors. Look at Silvergate. It was operating just fine. And then suddenly, without warning, the FDIC shut it down. Everyone who had more than $250,000 in deposits suddenly discovered that their money was gone. Who has that much cash in a bank?

Well, not just rich people. Ordinary businesses do. Think about your local grocery store or car dealer or law firm. Do they have 100 employees? If they do, they've got more than $250,000 in their bank payroll account, and suddenly they discover the money's not there. Everybody woke up to discover that they're out of business because the FDIC decided to close a bank that it wasn't happy with who was doing business with some crypto companies. 

You're going to shut down an entire bank over that? And wipe out the accounts of all of the bank's customers, not just the crypto ones? Are you kidding me?

So what have depositors done as a result of this? They've been closing their bank accounts all over the country so they don't have to worry that they might wake up one morning to find out that the Feds had shut down their bank. In the three weeks since the Feds shut down Silicon Valley Bank, depositors have withdrawn $300 billion and moved that money to money market funds. There's now over $5 trillion in money markets all over the country compared to $20 trillion in banks.

Well, now that so many people are moving money to money market funds, often for the first time, and you might well be one of them - let's make sure you understand how money market funds work. These things look like bank savings accounts, but they're not issued by banks. They're issued by mutual fund companies. That means there's no FDIC to protect you these days. Considering the stupid behavior of FDIC and the fact that FDIC has only $0.03 for every dollar it's insuring, the fact that money market funds are not covered by FDIC, frankly, I don't think it's an issue. The price of a money market fund is always $1, just like a bank account. And it pays interest just like a bank account typically these days. 4.4% in annual interest. Some of these money market funds pay a higher yield than others.

So let me tell you how to shop and compare them. First is the annual fee. All other factors being equal, the higher the annual fee, the lower your yield. But you'll find pretty much that all money market funds are kind of similar in their fees. I don't think you'll find a huge difference from one to another. So more important than the fee is this question, what are they doing with the money that you deposit with them? Some money market funds invest your money exclusively into short term Treasury Bills. 30-day Treasuries are considered the safest investment in the world because they're backed by the full faith and credit of the United States government. But 30-day T-bills, because they're so safe, also pay the lowest interest rate.

And so some money market funds try to get a higher interest rate. And they do that by buying 30-day paper that's not issued by the Treasury Department, but instead issued by Fortune 500 companies. This is called commercial paper. AT&T, IBM, Johnson and Johnson - do you think any of these companies are going to go broke in the next 30 days? Not very likely. And so that makes their 30-day paper pretty much as safe as the federal government's 30-day paper, the Treasuries, in practical terms anyway. But these commercial 30-day bills pay a higher interest rate than the federal Treasury does today. You'll get 4.5% instead of 4.4%, one tenth of 1% higher in yield. Well, they're only a little bit riskier, so they pay only a little bit more in interest. You can decide whether the extra one tenth of 1% is worth the bother. 

So when you buy a money market fund, you need to see if it invests exclusively in US Treasuries or whether it also invests in commercial paper. Keep in mind that money market funds are mutual funds, which means you're not making deposits and withdrawals like you do with a bank account. Instead, you're buying and selling shares.

Now the share price is always $1, but because you're buying and selling shares, you're technically dealing with securities. And that means if you sell the shares today, you've got to wait till tomorrow to be able to have access to your money, to transfer the money to your bank account or to wire it to somebody else. And it's also possible that the $1 share price might one day suddenly not be $1. This is called breaking the buck. And it's rare. Very rare, but it has happened.

Money market funds have been around since the 1970s. And the first time one of them broke the buck was 1994. The community bankers, US government money market fund was liquidated at $0.96, and during the 2008 credit crisis, the Reserve Fund, another money market fund, suffered massive redemptions because it had placed a lot of its money in commercial paper that was issued by Lehman Brothers, which was going broke at the time. During the 2008 credit crisis, the Reserve Fund broke the buck and paid out only $0.97.

Now getting back $0.96 or $0.97 instead of the dollar, that might not sound like a crisis. I mean, you compare that to last year's stock market losses where the Nasdaq was down 35% last year. Losing $0.03 or $0.04 on the dollar. That doesn't sound like a big deal. But remember, the people who are putting their money into money market funds are doing so because they want no risk of losses, not merely low risk.

Still, overall, the risk of loss is low with the money market fund and the amount you might lose if you were to somehow lose, is also pretty low. And considering the nonsense that's going on with the federal banking regulators these days, it's entirely understandable why a lot of bank depositors are moving their money out of banks and into money market funds. If you're nervous about your bank and what's happening with the FDIC and its limits on the amount of cash it actually does have to bail out depositors if needed, talk to your financial advisor about using a money market fund, or you can contact Schwab, Fidelity, or Invesco. They manage some of the biggest money market funds in the country. You can learn more about each of their money market funds by going to their websites. Fidelity.com. Invesco.com or Schwab.com.

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