Looking for the High Ground
The faltering financial sector has raised awareness of the importance of keeping our money safe. This email will review the safety of brokerages as well as banks, with Treasuries as the benchmark. We are primarily looking at short-term options, comparing relative safety with yield.
Attached is a recent analysis to compare yields of various short-term options for cash which Chad Silver prepared in our office.
In comparing CD rates offered by various banks, keep in mind that the shakiest banks offer the highest rates. We use www.bankrate.com to evaluate the soundness of banks, if you are interested in using it. The CD’s we list are examples offered by banks rated 4 and 5 stars (5 is the highest rating). They are all available through Schwab and are still FDIC insured if held in your Schwab account.
Since some clients use brokerages other than Schwab, you might be interested in this analysis which Jason Moore prepared, comparing stock prices of various wirehouses. A steep drop in stock value doesn’t necessarily mean the company is headed for bankruptcy, but companies which go bankrupt all have dropping prices.
July 13, 2007 July 14, 2008
Charles Schwab $22.22 $19.04 -14%
Merrill Lynch $86.54 $25.93 -70%
Citigroup (Smith Barney) $52.52 $15.47 -71%
E-Trade $1.41 $.25 -82%
Morgan Stanley $73.26 $32.25 -56%
UBS $61.49 $18.72 -70%
All major brokerages, including those above, are covered by SIPC insurance. In the past 50 years, no customer of a brokerage company has lost money due to failure of the company which wasn’t covered by SIPC. Brokerages which failed and required SIPC to pay off their customers are usually small companies with bad recordkeeping, or tainted by fraud.
The only way you could lose money or securities in your Schwab account is if securities were stolen, and Schwab went bankrupt, and SIPC was unable to cover the losses. This is extremely unlikely. (Note that than limited partnerships, futures, foreign exchange transactions, commodity contracts, precious metals contracts, etc. are not considered securities).
Our general recommendation for clients is to use a FIDC insured checking account for general cash needs, and an SIPC insured money market for other cash reserves. For short-term cash, generally we only use Treasury Bills for very large amounts of money which would be beyond FIDC or SIPC limits.
We hope this information is helpful to you. Please let us know if you have further questions.
Bert Whitehead, MBA, JD