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protecting cash


klarmaniac
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With all asset prices rising I've been selling more and buying less and so cash is comprising a bigger percent of my portfolio. I checked with my brokerages to make sure the cash was safe but I wasn't impressed by their answers.

FDIC insurance seems to only cover $250k. Apparently this used to be per account, but I think it's now a total for a given social security number.

The brokerages usually have additional coverage, but it seems very limited. For the two I talked to, they had aggregate limits of around $500m across all their accounts, for all cash balances above $250k per account. That seems ridiculously inadequate for brokerages with millions of accounts. I asked how much they currently have in balances above $250k per account and they said they didn't know. I think it would have to be at least tens of billions, meaning the insurance covers almost nothing.

I also had trouble getting details on what exactly is protected. Bank/brokerage failure? Unauthorized withdraws (which one article claims has risen fivefold in the last two years)? etc.

The only other option I've found is CDARs and MMAXs, which I think would require a lot of care and feeding (e.g. laddering).

For now I'm fine with zero return, I just want a totally safe place to keep cash which I can access immediately if the market drops a lot.

Does anyone know how hedge funds, mutual funds and other institutions with large cash holdings keep their cash safe? Or have you found a way to keep your cash safe? Any ideas are very much appreciated :)

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Mine's buried under the chicken coop. 

 

Just kidding.  I don't keep a high percentage of cash, so I'm under the $250K limit.  Just some ideas off the top of my head:

 

1) How about a safe deposit box?  No interest, but probably pretty safe.

 

2) Is there private insurance you can buy for cash deposits?  I remember years ago (about 17 years ago I think) I was with a credit union that claimed all deposits were insured in full with a private insurer for any amount over the FDIC limit, if such a thing still exists you might look for a bank which has this.

 

 

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SIPC is not like FDIC, it is not backed by the us govt.  So the SIPC protection on your brokerage account is not as good as FDIC. FDIC is backed by the full faith of the US govt just like treasuries IMHO.  If you are concerned about protecting cash why don't you open multiple bank accounts. Also many brokerages have a sister bank. So then you can just park 250k it in the bank on top of  your $500k brokerage protection. And transfering as I recall is instant between the brokerage and the sister bank.

 

FDIC protects against anything that happens to your account. Bank robberies, inadequate reserves, bankruptcy. BTW I've experienced a FDIC rescue, I just got a letter and they told me transfer you money out ASAP please or else we'll mail you a check for your balance.

 

SIPC is supposed to make you whole. So if you own a stock that is stolen by your broker SIPC will rescue you. SIPC also protected madoff investors although I don't know why so it is a grey area what is protected I think.

 

 

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Some brokerages have a cash product that spreads deposits across FDIC banks.  I know SmithBarney used to have this, and Fidelity does as well.  Fidelity has a SmartCash account where all of the cash appears in one account, but at each $250k threshold they put the money into a new bank.  I believe they have five banks they work with, so you can potentially have $1.25m protected.  Beyond that you can purchase CD's online in $250k chunks from different banks. 

 

I don't know how much you're trying to protect, but there are 6500 banks in the US, maybe only 1000 would open CD's for you out of area, but presumably you could protect $250m or so via CD's and accounts.  Maybe even $500m if you were creative in how you named accounts with a spouse.  Now granted it'd be a full time job, but if you wanted FDIC protection I believe it can be done.

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FDIC insurance seems to only cover $250k. Apparently this used to be per account, but I think it's now a total for a given social security number.

 

Are you sure it isn't still $250k per owner per institution per ownership type?

 

All your individual account together gets $250k protection. All your spousal accounts together gets another $250k. The joint account with the spouse gets another $250k. So you and your spouse could get a total of $750k protection.

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FDIC insurance seems to only cover $250k. Apparently this used to be per account, but I think it's now a total for a given social security number.

 

Are you sure it isn't still $250k per owner per institution per ownership type?

 

All your individual account together gets $250k protection. All your spousal accounts together gets another $250k. The joint account with the spouse gets another $250k. So you and your spouse could get a total of $750k protection.

 

But that is per bank, right? From the FDIC site: "The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category."

 

 

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FDIC insurance seems to only cover $250k. Apparently this used to be per account, but I think it's now a total for a given social security number.

 

Are you sure it isn't still $250k per owner per institution per ownership type?

 

All your individual account together gets $250k protection. All your spousal accounts together gets another $250k. The joint account with the spouse gets another $250k. So you and your spouse could get a total of $750k protection.

 

But that is per bank, right? From the FDIC site: "The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category."

 

Correct, per bank.  So you can open accounts at two banks and get $1.5m in protection.  Open accounts at 20 banks and it's $15m worth of protection.  If you're an individual you can scale this fairly easily.

 

The caveat is that these rules only apply to individuals.  A business can't get protection beyond the $250k level as easily. 

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One way of thinking about protecting your cash is buying a "death put" in your broker.  For example, if your prime broker is Goldman, buy the April 2015 $100 put at $0.21 per put.  This gives you 476x protection in case GS goes under.  You will have to roll the puts 4x a year. 

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Probably the biggest protection is being vigilant where you have your money.  If the broker is highly levered with risky assets or losing money I would pull my money out.  It is rare (although possible) to have a sudden failure.  More typical is a somewhat slow progression of bad results and then failure.  I like to check IB's results quarterly.  Also, I like the culture at IB - risk averse and they seem straight with customers.  I would not put my money in a sleezy broker - higher risk of fraud.  That is a qualitative judgment though.  The insurance that I have looked at can be expensive. 

 

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