Vanguard Cash Deposit and FDIC

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winterhascome
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Joined: Thu Jan 26, 2017 8:48 am

Vanguard Cash Deposit and FDIC

Post by winterhascome »

My wife and I have a Vanguard Brokerage Account and I understand that the new Cash Deposit is FDIC insured. As a shared account, we should get a minimum of $500K FDIC insurance. However, because the monies are spread among "program banks" would we be insured up to $500K in each program bank? Any insights are greatly appreciated.
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David Jay
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Location: Michigan

Re: Vanguard Cash Deposit and FDIC

Post by David Jay »

I see no one has responded about the "Cash Deposit" feature. It is even hard to find on the Vanguard website so I don't know what to say about that.

May I ask why, if you have a Vanguard brokerage account, you are interested in this feature? Have news reports of recent bank failures caused you to worry about the safety of your Mutual Funds? A couple of thoughts:

1. The bank failures have been due to issues involving "fractional reserves". Banks do not keep all of your money in a vault. They loan most of it out to others who pay interest on the loans. The banks only keep a small portion (i.e. a "fraction") on hand. In a bank run, depositors request withdrawals that exceed the fractional reserve.

2. This is not the case with mutual funds. All of your purchases are real assets, there is no "fractional" issue. In the case of the various "Federal" money market funds, the assets primary investments are backed by the full faith and credit of the US government. A federal money market fund is almost without risk. Even the assets themselves are not held by Vanguard, they are held by a third-party. If Vanguard ceased to exist next week, all of the assets would still exist and would be made available to you as quickly as the paperwork could be handled.

[edited per JoMoney’s comment below]
Last edited by David Jay on Thu Mar 30, 2023 7:58 am, edited 1 time in total.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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David Jay
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Location: Michigan

Re: Vanguard Cash Deposit and FDIC

Post by David Jay »

Here is a Boglehead thread on the Cash Deposit offering. I did not find it with the BH search, but I found it with a Bing search: viewtopic.php?t=390825
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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JoMoney
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Re: Vanguard Cash Deposit and FDIC

Post by JoMoney »

David Jay wrote: Wed Mar 29, 2023 5:08 pm... In the case of the various "Federal" money market funds, the assets are backed by the full faith and credit of the US government...
That's not quite true, explicitly some of the 'Government Sponsored Enterprise' debt securities do not carry that 'full faith and credit' backing:
https://personal.vanguard.com/pub/Pdf/p ... 2210171184
...
Vanguard Federal Money Market Fund invests primarily in securities issued by U.S. governmental agencies and instrumentalities whose interest and principal payments are backed by the full faith and credit of the U.S. government, such as those issued by the U.S. Treasury and the Government National Mortgage Association (GNMA). The Fund also may invest in securities issued by U.S. governmental agencies and instrumentalities whose interest and principal payments are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These agencies and instrumentalities include, among others, the Federal Home Loan Banks, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation.
...
... but, there is a widely viewed "implicit backing", that was shown to be the case in the 2008 financial crisis, if the Government didn't stand behind this agency/enterprise debt, they wouldn't be able to exist to perform the function Congress chartered them to do, the rates to carry the (massive amounts of) debt would explode, and would just have huge impacts to the whole system, so...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
barelybarefoot
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Re: Vanguard Cash Deposit and FDIC

Post by barelybarefoot »

Sounds like new online high yield savings account by Vanguard paying 4.35% and FDIC insured up $250k. I’d consider it except worried about the online part and how easy transactions will be. I’ve not had the best online experience with Vanguard or with customer service.
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