In the "Wizard of Oz" movie, Dorothy, the Scarecrow and the Tin Man march arm-in-arm through the forest and try sustaining their courage while chanting, "Lions and tigers and bears, oh my!" Of course, their courage evaporates as soon as the cowardly lion jumps out and surprises them. Recently, I’ve been reminded of this "whistling in the graveyard" approach as chants of "FDIC, SIPC and Money Market Funds — Oh My!" echoed through the financial system.

We’re witnessing a dramatic remaking of our financial system, including the various guarantees and insurance protections designed to provide investors with some peace of mind about the safety of their money. Let’s review the basic protections and how they’ve changed.

FDIC
The Federal Deposit Insurance Corporation (FDIC) insures bank deposits. The FDIC is an independent agency of the U.S. Government. Until recently, FDIC insurance was limited to $100,000 for each separate account registration, except for retirement accounts, which had $250,000 of coverage.

Beginning in October 2008, and continuing through December 31 2009, FDIC limits were increased to $250,000 for each separate account registration. The coverage limit on retirement accounts did not change and remain at $250,000. In addition, any personal or business checking account that does not pay any interest will have unlimited protection. This last provision is aimed at large business customers who otherwise might have money on deposit way beyond the coverage limit

SIPC
Securities Investor Protection Corporation (SIPC) is a private nonprofit funded by member securities brokerage firms. SIPC covers up to $500,000 for each brokerage account customer (per person per account type). Within this $500,000 limit, the coverage on cash is further limited to $100,000. In addition to this required SIPC protection, many brokerage firms have obtained additional excess coverage that further extends customer protection.

SIPC has a very different purpose than FDIC. SIPC does not provide any protection against investment losses due to bad decisions or market value declines. Instead, SIPC protects investors in the event a brokerage firm fails and a customer’s assets are missing. So, if your investment is lousy, that’s your problem, but if you call your broker and the phone has been disconnected — call SIPC. However, even if a brokerage firm failed, it is unlikely a customer’s assets would be at risk, since firms are required to keep customer accounts segregated from their own. Since 1971, 317 brokerage firms have gone under and only 1/20 of 1% of customer claims were not fully satisfied by SIPC.

Money Market Funds
Investors have long considered money market mutual funds (as distinguished from a bank’s "money market accounts") to be a safe place to keep their cash while earning a competitive short-term yield. Money market funds are not covered by FDIC, but are considered low-risk investments since they primarily buy high-grade commercial paper, which is basically a short-term IOU from a major corporation. However, in the current financial turmoil, worried investors began withdrawing billions from money market funds, concerned about the safety of the commercial paper owned by their funds. In order to stem this outflow, the Treasury announced a temporary guaranty program, fully protecting balances held — as of September 19, 2008 — in participating money funds. The program is designed to last no longer than one year, but this is the government, so who knows when it will really end?

Mutual Funds
Other than money market funds, what about the stock and bond funds that many people own? Obviously, there is no protection from investment declines, but if the mutual funds are held in a brokerage account, they are covered by SIPC, as mentioned above. But, what about mutual funds held directly with the mutual fund company? They are not covered by SIPC, but don’t need to be. The assets of a mutual fund are held in a separate account by a bank or other custodian, and are not subject to any business risk.

Our financial system has been under tremendous strain, but these existing and expanded protections should help us weather the storm and, much like Dorothy, allow depositors and investors to make it to the Emerald City and ultimately back home again.