With all that is going on in the financial industry, I am diversifying my assets. One option I am considering is putting some money into my bank’s US Treasury money market fund. As we know, these are not FDIC insured. Here is the question – if my bank were to fail, is there any security or insurance for the money I have in this fund. I know that U.S. Treasury bonds are backed by the U.S. government, but if my bank establishes a U.S. Treasury fund and then fails, am I any more protected than an public company shareholder if such company had invested in U.S. Treasury bonds?
Many thanks…
Short answer: Possibly, but not by much. Securities firms have insurance covering clients’ funds in the event the firm fails. Banks may have similar insurance for their funds, but as you said it certainly isn’t FDIC coverage.
I know you didn’t ask this, but you might want to check out the expense ratio - what the bank is skimming for itself. Then, compare it to Vanguard.
Your question is a little tricky. Essentially the Treasury mutual fund will hold a set of really, really safe assets. If the mutual fund fails, presumably you would have claim to those safe underlying assets.
But… often mutual fund families have agreements to lend within the group if one fund or another is under distress. And if interest rates rise quickly, the money market fund is very long, and they cater to clients that are apt to pull their money out quickly… then a liquidity squeeze is imaginable and you might receive only 99 cents on the dollar, for example.
Then again, while bank deposits under $100,000 in the US are very safe, nothing is 100%. Suppose the FDIC fails and Congress can’t put together a sufficient rescue package. That sound implausible to me, but isn’t there at least a tiny chance of it?
Oh yeah. You can also buy 3 and 6 month Treasury bills directly through Treasury Direct..
Your bank’s investment arm is probably insured through SIPC.
The other day, CNBC interviewed Alan Blinder, who was vice chairman of the Federal Reserve System under Clinton. He now runs something called CDARS, which is a service that allows you to deposit up to $50 million in a participating bank and have the entire sum be insured by the FDIC. As I understand it, the first bank deposits the money in $100,000 increments in other FDIC-insured banks. Of course, you won’t get the best interest rate, but you will get FDIC insurance on the money.