Did you know that you Money Market Account could have sub-prime mortgage exposure and thus you could your principle? Did you know that they are also not FDIC insured? Its true, MMA’s invest in RMBS (Real estate Mortgage-Backed Securities) and other SIVs (Structured Investment Vehicles). Both RBMS and SIVs can be used to invest in sub-prime or alt-A mortgages, both of which are a risky proposition right now. Maybe even prime mortgages are risky too. With such lax underwriting standards the past few years, it really isn’t a surprise that there are so many defaults occurring.
Another thing to consider is that MMAs are not covered by FDIC.
The fact that FDIC may not even have enough money to pay out all the investors if several banks go under is a separate discussion.
Also, stay away from savings accounts with banks that have significant mortgage exposure. If you have less than the FDIC limit of $100,000 you’ll get your money back, eventually, but its still a hassle.
Banks like Countrywide, which is facing HUGE mortgage-related losses, could fold and unnecessarily tie up your money for several months. Much better to spread your risk around.
I do not have a money market account. And I have my savings spread out between Bank of America, ING Direct, Commerce Bank and Capital One Bank. Maybe I’m being paranoid, but based on the impossible black-swan events that keep occuring in the financial markets, I’d rather be safe than sorry.
In fact, I think keep my cash in a brokerage account with no exposure to mortgage-backed securities may not be a bad idea. Most brokerages are covered by SIPC rules which extend to $500,000. And buying Treasuries, Munis or even Senior Income Trusts like VVR may not be a bad idea!