Curious to see if they also strike a deal with Nishad Singh. He was the director of engineering at FTX that supposedly authored the code that exempted Alameda from liquidation.
How many deals do they need? I'm afraid of prosecutors cutting too many deals, being too lenient on the guilty, just to make their jobs easier - making practically certain cases 1% more certain in exchange for not punishing appropriately.
I think it's good to get one or two insiders - Ellison and Wang seem ideal. Why does the state need more?
I think that's hugely dependent on whether you believe the cost function for prison is linear? I would expect most people to say no. The difference between 0 and 10 years is much greater than 10 and 20 years.
If that is the case, then putting 10 people away for 10 years due to greater certainty of conviction, but also more lenient sentences, has greater social utility (as a detterrent) than only putting one person behind bars for 100 years, with 9 others getting off scot-free.
That's also bad. Prosecutors hold a huge sentence over people and compel them to confess - it's a kind of hypothetical torture, forcing you to confess by the bad stuff they'll probably do to you.
Prosecutors, along with their investigators, should come to a position on whether a party is guilty and if so what punishment they deserve. They should then make that case in court. Courts would need much greater throughput to handle this, but the current method seems much worse.
> SIPC insurance provides protection for your cash balance and securities holdings if Robinhood fails financially, but does not cover investment losses due to declines in the value of securities themselves.
Emphasis mine.
If you put $250,000 into an FDIC-protected checking account, that account holds cash and FDIC protects the full amount of that cash.
If you put $250,000 in an SIPC-protected brokerage account, that account holds both cash and securities, and SIPC does not protect you from a decline in the market value of those securities. So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings.
I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It also seems like there could be weird tax implications if your "checking account" has to liquidate securities to cover a big check you wrote.
I think that just keeps people from making claims against the stocks they bought going down in price. A checking account holding dollars isn't going to lose protection because Robinhood the company invested in some stocks.
Aside from that, it appears they're investing this money in short-term treasuries rather than stocks, making up the difference in merchant fees for debit card transactions, and maybe treating this as a loss leader. They've partnered with Sutton Bank since they don't have their own banking license.
>So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings.
FWIW, some Vanguard bond mutual funds (most of the investment-grade ones) allow you to write checks against them, and those funds can lose value.
I can't find an easy link that says which specific ones, but here's their policy:
Note: this isn't a general checking account that permits debit card usage, and each check must be for at least $250. But right now, you can use their Prime money market fund, which aims to avoid loss of capital ("breaking the buck" is very rare) and write checks against it, and it yields ~2.3%
What are securities in this context? Is that not something that you personally choose to invest in?
Because if it is, then this is basically the same. Your cash is fully insured, but obviously your investments run investment risk.
If Robinhood automatically converts your money into securities, then it's a different matter. It sounds unlikely to me that any bank account would work that way, but I don't know how Robinhood works.
Not an expert in this domain but I'll cover the basics: ecurities are a euphemism for stocks and similar. Banks have been loaning out the money you deposit since the beginning of time; it's how they make money. They don't keep all the cash that people have deposited on hand, which is why a "run on the bank" was problematic in the past. They basically keep enough cash around ("reserves") so that the average withdrawals don't get them into trouble. And yes, you are certainly not choosing the investments that the bank makes with your money. And they're not "your" investments: the bank pays you a small fee (3% in this case) and then takes risks with your money to make a higher return and keep the difference.
I'd recommend reading up on the Federal Reserve (The Creature from Jekyll Island), the modern financial system (any of Michael Lewis's books, especially Boomerang and The Big Short), and maybe the first global banking families (The Medicis: Power, Money, and Ambition in the Italian Renaissance). We're talking about the power structure of the world here and it's good to be informed on the main points.
So what does that mean here? Are you saying that the part of your money that the bank uses to invest, is not insured? If so, then what does the insurance for the remainder even mean? Money that the bank doesn't touch doesn't need to be insured, because it's always there. The whole point of such an insurance is to reimburse you in case the bank loses your money due to their bad investment. If that's not covered but only the part that they never touch, then the whole insurance becomes meaningless.
I still suspect that the securities mentioned are your own securities rather than the bank's, which makes it totally sensible that they're not covered by the insurance.
My understanding is that yes, you're not covered if the bank suffers losses and passes them on to you. The entire industry is one giant moral hazard due to complete lack of skin in the game on the part of the banks. They don't own the money and aren't responsible for catastrophic losses (see the '08 and previous bailouts), but they control it and keep the upside. You're right, that insurance sounds like garbage, but I haven't bothered to dig into the details. Caveat emptor!
"Own nothing, but control everything." -John D. Rockefeller
edit: good note from /u/snowwrestler below:
> > It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
> If I'm holding 100% securities, a) SIPC offers me no protection from losses, b) I better be making more than 3% return, and c) I would not call that situation "a checking account."
I think the loss case they're protecting you for is more
"I bought 100 shares of Acmecorp, then Robinhood shuttered their doors and said they sold the shares to fund their yacht."
The SIPC's job there is to reimburse you for 100 shares of Acmecorp as of now; they're not going to let investors cherry-pick and say "but they mishandled the account during the one day it was at its peak and I want that price!"
That's my question. I understand how SIPC protects the cash in my brokerage account, and I understand how I can use that cash to generate returns. And brokerages have offered "cash management accounts" with checks and ATM cards for years.
I don't understand what a "checking account" is that guarantees 3% interest and is covered by SIPC instead of FDIC.
I don't think understand that correctly. There's no such thing as a SIPC-protected checking account that holds securities. A checking account holds cash.
There's SIPC protection for your cash and securities (stocks etc.) that Robinhood holds for you, up to 250,000$ each. For obvious reasons, the value of a security in dollars fluctuates and therefore such losses cannot be insured. What is being recovered is the securities themselves, not their dollar value at a time of your choosing.
> I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
Actual banks hold only a small fraction of cash deposits in reserve, many of their assets may just as well turn out to be made up of bad loans, bad junk bonds and bad stocks. That's how banks can fail even without a bank run.
> It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
If I'm holding 100% securities, a) SIPC offers me no protection from losses, b) I better be making more than 3% return, and c) I would not call that situation "a checking account."
Okay, it seems like you don't understand the very basics.
A checking account holds 100% cash (dollars), not securities. That cash is insured by SIPC up to $250,000, just like the cash in your bank account is only insured up to $250,000.
Securities is things like stocks. Stocks are subject to significant gains, but also significant losses. That's the investment risk you have to take. There's no way around it. There can't be a government insurance against it. You can buy "insurance" against losses by purchasing options to sell at a specific price, or you can reduce risk by diversifying your portfolio.
I don't know the details of how securities are valued for recovery in the context of SIPC, but the point is that you will receive (parts of) your securities, not cash. Therefore, if for example you hold Microsoft stock at the time of bankruptcy of Robinhood, you are not entitled to be reimbursed any losses that may have occured as a result of Microsoft's stock price dropping in the meantime. Conversely, you do not owe any gains that the stock price may have made.
"If I'm holding 100% securities, a) SIPC offers me no protection from losses"
Sure it does. The point of SIPC is that if your broker goes under, and you had, say, 100 shares of MSFT and $100 in cash, you get those things even if your broker somehow comes up short. Now, what 100 shares of MSFT is worth in dollars is unrelated to SIPC and depends on the stock market.
The purpose of SIPC is to protect against a breakdown in financial abstractions at one particular level.
Robinhood's checking account only holds your cash, just like any other checking account. I'm not sure why you think you can hold securities in a checking account, or why you keep calling it a "checking" account. It's just a normal checking account, FDIC and SIPC are the same protection when you are holding cash.
I don’t think that’s accurate. It’s primarily to make it clear to people that securities can lose 100% of their value. There is no guarantee.
But cash in a checking account is not going to suddenly start showing negative returns.
The only example I can think of what you’re referring to is the new Betterment checking account which is basically like a security masquerading as a riskier savings account.
I am not sure about that. It's how you are holding the money and not Robinhood. When I put 100,000 in cash in Robinhood and I am not converting it into to some Robinhood tokens that get appreciated by 3% every year. I keep it in USD. So it should be cash as per the SIPC definitions.
> When the return is higher, the risk must have gone up too, somehow.
I want to emphasize this point. You are never* getting returns for free, you are getting paid to take on some risk. If someone is trying to sell you "risk-free" returns that are higher than widely-known market rates, they are lying to you by downplaying, omitting or obfuscating the risk associated with those returns, and warning bells should be going off in your head. Proceed with caution.
* You can of course find better risk-adjusted returns than the market by way of information asymmetry in your favor. Suffice it to say that is not the case with a consumer financial instrument aimed at "the masses" (not high net worth individuals).
Sure, but you can buy US treasury bills, and then your risk is "lose some money if the US government defaults", which is very low.
We all live every day with risks far greater than that risk level.
If you look at the current treasury yields, they are very close to 3%. Add the interchange revenue, and RobinHood can pull a 3% guarantee while still making a (narrow) profit.
If treasury yields go down, then no problem: RobinHood can instantly adjust their returns downward. If they go bankrupt because of an unlikely combination of events - lots of deposits coupled with a very sharp and unexpected decline in treasury yields - SIPC will pick up the pieces and make sure you get your cash and securities up to $500k.
My understanding is that any cash and securities you own when they go out of business is covered up to the limit. So if you have $250k in your RobinHood checking/saving, that will be guaranteed by SIPC.
DISCLAIMER: I am not a financial adviser and nothing I ever post is financial advice.
> Sure, but you can buy US treasury bills, and then your risk is "lose some money if the US government defaults", which is very low.
There are all kinds of other risks associated with buying US treasury bills besides the US government defaulting, which is why you get paid - but you're right, the risk is low so you get paid a low amount. You have opportunity costs during the time that your money is locked up in treasuries. You also incur some inflation risk. If we are specifically talking about T-bills then we're talking about treasuries with maturities of less than one year, meaning that particular risk is low. There is interest rate risk. If you have an emergency and need to convert back into cash before the maturity date hits, you have to sell them on the market, where you may lose money if interest rates have increased. If you're investing in the treasuries via an ETF or via a broker, you are incurring additional counterparty risk.
> If you look at the current treasury yields, they are very close to 3%.
The 10-year bond is 2.91%, the 20-year bond is 3.05%. Investing in a 10 or 20 year bond is obviously different than having a checking account which can be emptied at any time without penalty and without having to go to the market to find a buyer, so there's a large maturity mismatch that's being incurred by your counterparty, RobinHood (assuming they are in fact investing in long-dated treasuries).
> If they go bankrupt because of an unlikely combination of events - lots of deposits coupled with a very sharp and unexpected decline in treasury yields - SIPC will pick up the pieces and make sure you get your cash and securities up to $500k.
The part where they pick up the pieces could take weeks or months; if you need the cash before then, you're in trouble. If you can afford to wait, you're right, no big deal. I don't expect RobinHood to go bankrupt tomorrow, but if they were wiped out as part of a wider financial crisis, it's possible that under those conditions you'll need access to your cash quicker than you think.
Every dollar-denominated investment incurs inflation risk, including any sort of cash account like a dollar saving/checking account.
> If you're investing in the treasuries via an ETF or via a broker, you are incurring additional counterparty risk.
That counterparty risk is exactly what SIPC insures.
> Investing in a 10 or 20 year bond is obviously different than having a checking account which can be emptied at any time without penalty and without having to go to the market to find a buyer, so there's a large maturity mismatch that's being incurred by your counterparty, RobinHood
But RobinHood can make certain reasonably safe assumptions about the flow of capital into their various accounts, and adjust based on that.
For example, while they're growing, every withdrawal will be matched by a great amount of deposits. So they'll always have the cash in hand to satisfy withdrawals.
Of course, if they ever stop growing, that assumption no longer holds. But the very nature of startups is to bet on growth, even at the risk of potential bust (since failing to grow rapidly means failure).
> The part where they pick up the pieces could take weeks or months; if you need the cash before then, you're in trouble. If you can afford to wait, you're right, no big deal. I don't expect RobinHood to go bankrupt tomorrow, but if they were wiped out as part of a wider financial crisis, it's possible that under those conditions you'll need access to your cash quicker than you think.
Absolutely. I would keep an emergency fund in an FDIC-insured bank account somewhere else.
> Every dollar-denominated investment incurs inflation risk, including any sort of cash account like a dollar saving/checking account.
You're right, inflation risk isn't particularly relevant when comparing treasuries vs checking accounts or cash. Those are all exposed.
> For example, while they're growing, every withdrawal will be matched by a great amount of deposits. So they'll always have the cash in hand to satisfy withdrawals.
Ha, if we can just assume they'll have money pouring in faster than withdrawals, even when markets experience turmoil, there's very little to worry about! I don't know exactly how sure we can be about that - or at least, for how long.
> Absolutely. I would keep an emergency fund in an FDIC-insured bank account somewhere else.
Wise, and it sounds like we're on the same page. All I was arguing is that there is some risk here that's being glossed over by selling it as just-another-checking-account-except-you-get-more-money. Maybe small/unlikely risk, but you're not getting 3% for free. You can always just go buy some IEF or TLT or actual treasuries too.
What is your theory, that every single other financial institution has willingly taken on a bunch of expenses they don't need to?
This comment just reinforces my feeling that Robinhood's business model is to extract money from credulous customers who think they are too cool for regular banks.
Banks who petition the Fed for FDIC insurance face much stricter reporting rules, capital reserve requirements, and limits on the riskiness investments they can make with client deposits from FINRA and the SEC. If you wanted, you could view the lack of FDIC insurance as a sign of a riskier institution overall, but like any other investment it might be worth it for the higher rate.
Just FYI, AFAIK, the standard 10 percent fractional reserve rate is no longer law after legislation post 08 crash bankers slipped through. So that old rule is very often not the case at a bank anymore.
Right. They don't have the same level of commitment from the US government.
SIPC is like Fannie Mae, where the US implies a backing without making a promise. When push comes to shove the US Government gets to choose whether to do a bailout on a case-by-case basis.
FDIC is not like that at all. The US explicitly and unconditionally backs them.
Look at it in political terms. FDIC is guaranteeing everyone's savings, rich or poor. You just can't let that fail. SIPC is guaranteeing a bunch of investments. If the class in power takes a dim view of bailing out a bunch of "wealthy speculators", the ball can definitely be dropped.
You shouldn’t store more than $250k in cash in any kind of bank or brokerage due to the insurance limit (unless the bank has account insurance beyond $250k.) Investments are different, of course.
Edit: I forgot about the details of the limit. Thank you all.
EDIT: According to the link shared by mortenjorck this is incorrect. A banker explained this to me a while ago, and I just took their word for it. I might have to call my mom now. I'll leave this up so that anyone else with the same misconception will know its wrong
It's actually per bank, per type of account. So $250k in savings accounts, $250k in checking, $250 in Money Market, etc.
This is incorrect according to the FDIC’s website:
> All single accounts owned by the same person at the same bank are added together and insured up to $250,000
Revocable trusts, joint accounts, and other types of accounts with multiple custodians are covered separately, but checking, savings, and so on are not.
With a little bit of work, you can probably spread your money into a few of those categories without much problem and have more than $250k coverage, but it's not as easy as just having checking and savings.
Brokerages love fat cats and most provide free high quality additional insurance up to at least 5-10M. What happens if brokerage fails? My bet is its insurance, reinsurance or gov't would bail investors out (ask Lehman clients many of whom had accounts a LOT bigger than 250k). My guess is that it is safe to keep at least 5M in a single brokerage, but decide for yourself.
Can you provide some references? This is an honest question, I am just stunned that this did not cause major account fragmentation (fat cats splitting millions into 500k chunks). Just googling (which, granted, is not truth) seems to point to major news outlets confirming that customer accounts were safe.
To clarify, I am talking about customers who held money at LB invested in mutual funds or securities. If the account had a mix M of securities before LB collapsed they would have the same mix once the dust settled and LB account was forced to whatever other brokerage. If this is incorrect (not for some advanced hedge funds, etc. but for retail customers) I would love to know.
If you are talking about folks who held LB stock or bonds, they sure did lose money when the company went bankrupt, but that is not unexpected. Stocks fluctuate in price and some go all the way to zero; for every Google there are a few KMarts, Sears or Enrons.
This came after a quick search, which seems to confirm that if a client had, say, 100 shares of Amazon in a brokerage account at LB he would still have those: a brokerage must separate retail customers investments in other securities from its own money and funds.
However, reading more I am not as sure that individual investors holding money in LB investing in other (non-LB) securities did not suffer. I am not an expert and cannot always distinguish between reputable sources and conspiracy theorists. Can someone provide some good references?
IANAL, but I doubt FDIC vs SIPC matters for an average consumer. If either fails it would almost certainly cause a major run on banks and/or a systemic money transfers failure. Thus it is much cheaper for the gov't to print more money than suffer such consequences.
And if the gov't really wanted to weasel out of FDIC there are plenty of loopholes. For example, I think FDIC can take a long time (up to 10 years?) to pay and is not adjusted for inflation, so inflate, wait and pay pre-inflate amounts is an option (stupid, but technically possible).
Is it possible, that Robinhood is using high interest rate checking accounts not to make any money directly from them, but to encourage people to keep all their spare money one-click away from its investment products? In that case, checking accounts become just a business cost to Robinhood.
Checking accounts are loss leaders for most banks, even with low interest rates.
And big brokerages have offered this type of account for decades. It's usually called a "cash management account" and works just like a checking account--takes direct deposit, provides checks and an ATM card, etc.
Robinhood's innovation might simply be in calling it a "checking account" so the interest rate looks huge (it's actually small compared to expected investing returns) and marketing it to young people who are suspicious of big financial companies.
> to encourage people to keep all their spare money one-click away from its investment products
These are not mutually exclusive. Robinhood could write this off as CAC that's mitigated by investments into (relatively) safe and low-yield investments. Robinhood could spend a million on Google/FB ads, or they could have an X% chance of losing an amount equal to (3%-bond yield) where X is reasonably low. The (mitigated) loss gives them access to capital and access to customers. If the 3% is permanent, there is no reason for anyone to store their money in a different checking account, as inflation will eat into their savings if those savings aren't invested. Extremely smart move on their part.
In an email to Barron’s the head of the SIPC cast doubt on
the idea that it would insure checking or savings accounts.
“SIPC protects cash that is deposited with a brokerage firm
for one limited purpose...the purpose of purchasing
securities,” wrote Stephen P. Harbeck, the president and CEO
of SIPC. “Cash deposited for other reasons would not be
protected.”
That's pretty standard for a lot of these new-tech-wave style brokerage psuedo-banks. Betterment, Wealthfront, etc which also have a form of savings accounts (don't believe they offer checking accounts like rh is doing here) are SIPC only as well.
Betterment has their Smart Saver[1], which offers a 2.09% rate and attempts to position it as vastly better than FDIC-insured accounts by comparing to some terrible “national average” instead of the ~2% rates that Ally, Capital One & others offer. It’s still an investment account with the risk, tax implications & liquidity challenges that such an account has.
Their misleading marketing around this is driving me away from them.
Yep, I use Bettement for index funds and their “smart saver” idea is absolute trash. It’s a shady marketing term that is likely going to hurt a lot of people eventually. I don’t even really understand the appeal when most high yield savings accounts give you 2% now (I use Amex FSB).
Yeah, most of these firms use pretty bad metric comparisons for their marketing efforts to inflate how much better it is when in reality it's par for the course with Ally and others. Now that doesn't mean it's bad. Having used it there aren't that many challenges (I'd argue less because information is clear and the interface is nice to work with) and it's all bonds and the risk is low. Unless you have an argument bonds are risky compared to cash sitting against inflation. It's still all SIPC insured.
> Smart Saver’s built-in portfolio is the Betterment Portfolio Strategy’s allocation at 0% stocks, 100% bonds.
The one big downside could be is if you need cash _now_ it can take a few days (5?) before being able to use it.
The 404 is caused by the provider expecting less get requests than GB's bought. The author (sitting next to me) actually bought more traffic but the company decided to just stop after a number of GET requests.
