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What If Vanguard or Fidelity Went Bankrupt?

I hadn’t really thought about the prospect of a mutual fund management going bankrupt, but the author of this piece obviously did. The explanation he provides increases his comfort level with the arrangement with the mutual fund management company.

I think he is missing the bigger point. Vanguard is only the hired manager. They have even less skin in the game that most investors probably realize.

Since VGI [Vanguard Group Inc.] is actually owned and funded by the various mutual funds, it technically couldn’t go bankrupt unless all of the various mutual funds that support it went bankrupt. The only way that could happen would be for the value of all of the stocks and/or bonds held by each and every individual Vanguard mutual fund to go to zero.

http://www.mymoneyblog.com/archives/2007/05/what-if-vanguard-or-fidelity-went-bankrupt.html

Ok, so what if the stock market goes down 50-90% as some bears are predicting is coming in the foreseeable future – like mid 2007 or early 2008?

Under the Investment Company Act of 1940, which governs the industry, each fund is set up as an individual corporate entity, with its own board of directors.

from MONEY Magazine February 1, 2004
http://money.cnn.com/magazines/moneymag/moneymag_archive/2004/02/01/358875/index.htm

Who, exactly are these directors who make and authorize these decisions? Vanguard is going to be fired as the manager for the funds that own it? Sounds like they have a very good set up – heads, I win; tails, you lose. Liability, responsibility, authority… not Vanguard’s problem – they are just the hired hands.

I don’t find this reassuring at all!

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