Having too much cash is a good challenge, but it must be dealt with nonetheless. Shira Bitton’s personal accounts were beneath FDIC insurance limits ($250,000 per person, per account type, per institution), but as the controller for a large company, she was responsible for many millions in cash. Because banks lend about 90% of their cash deposits, should anything go wrong, they may fail, putting deposits above FDIC limits at risk. During the financial crisis of 2008, for example, hundreds of banks collapsed, from the tiny to the tremendous, jeopardizing hundreds of billions of dollars. What can those with significant cash balances do to protect their money from bank failures, and perhaps earn a bit of interest too?
Option 1: Stay with a SIFI
One way to keep deposits above $250,000 secure is to keep them in a “systemically important financial institution” (SIFI). During the crash of 2008, the US Treasury tried to teach Wall Street a lesson by allowing Lehman Brothers, one of the Street’s most prestigious institutions, to collapse under the weight of bad investments. This tactic blew up in its face, as the entire financial system began cracking, forcing the Federal Government to risk trillions (!) of taxpayer dollars to stop the entire economy from disintegrating. The lesson from Lehman ended up being that certain companies are “too big to fail”—their importance to the system is so high that the government has no choice but to keep them solvent. SIFIs, including Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, and a few others, therefore operate under the Federal Government’s unofficial but acknowledged umbrella of protection (even above FDIC insurance limits). For unlimited protection, Shira can easily maintain all her corporate accounts at a SIFI. While the rates will not be the highest, this simple method of cash protection may be worth it.
Option 2: Bypass FDIC limits
Having an unlimited deposit guarantee provides SIFIs with an unfair competitive advantage, and they’re not shy about using it to take business away from smaller rivals. Many of these disadvantaged banks have pooled their resources, linking their accounts to get around FDIC insurance limits. For example: with $10 million deposited at Lakeland Bank, Mrs. Bitton’s company is well above FDIC maximums. But because Lakeland is a linked bank, each Lakeland account can be electronically connected to separate institutions’ accounts, stretching FDIC insurance over the entire sum. This solution sounds complicated, but in practice, a linked checking or CD account functions just as smoothly as any other.
If you’re wondering how this works, technically, Shira’s $10 million-dollar account at Lakeland is chopped into 40 $250,000 parts and deposited electronically into 40 mini accounts at 40 different banks. Because each account is formally held at a different institution, it receives its own FDIC insurance up to $250,000, and the entire $10 million is FDIC insured! While it sounds like a considerable paperwork mess to have dozens of checking accounts, in reality, thanks to technology, all the accounts work seamlessly as one with a single online login, one statement, and, most importantly, immediate availability. This linked account loophole makes a joke out of FDIC limits, but so does the SIFIs’ unofficial guarantee. The political illogic of it all is not Shira’s problem; the bypass strategy is tried and tested, and commercial depositors can use it to protect even tens of millions of dollars.
Option 3: Lending To Uncle Sam
Maintaining bank deposit levels above FDIC limits is risky because the funds are then loaned to borrowers who may default on their obligations. The US government, however, despite being the world’s biggest debtor, can’t run out of money (in the short run at least), and the world’s most substantial savers protect their extra cash by lending it to Uncle Sam. For example, Berkshire Hathaway, Warren Buffett’s company, always maintains a large cash balance so he can jump on investment opportunities. This is stash kept secure and liquid, parked in Treasury bills (US bonds which mature in less than a year). Linked banks and even SIFIs would struggle to manage that much cash, and with treasuries, Berkshire earns a bit of interest while keeping its savings secure.
You don’t have to be a billionaire to lend money to the US government; anyone with internet access and $100 can become a big-shot banker to the USA! However, maintaining a significant portfolio of bonds can be a pain. Instead, the easiest way to get the security of owning US Treasuries is through a specific mutual fund called a Treasury money market fund. Like every mutual fund, a group of investors’ money is pooled, enabling professional management of the investment assets at a low cost. What’s unique about treasury money market funds is that they invest only in Treasury bills for ultimate safety and liquidity. Treasury money markets funds earn a pretty good return considering that they’re invested in the safest and most liquid asset in the world.