FDIC: Can We Hit You Back Next Year?

I came across a pretty scary story this morning regarding the Federal Deposit Insurance Corporation (FDIC). From Bloomberg:

March 4 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

So, in everyday speak: “Uh, look. We promised you that the money you have your bank would be insured up to 250,000 if the bank goes under. Will you be cool if we went back on that promise?”

This is not trivial. Remember how the FDIC works. Say you have a bank account with $120,000 in it. (First of all, if you are in this situation, what are you doing?!) The FDIC will (currently) insure all of this. So if your bank fails (like IndyMac did last year); the government (usually) steps in, takes over the bank, and tries to sell the bank after writing down the losses. If the FDIC goes insolvent however, they won’t be able to pay these obligations. So your entire balance will be uninsured.

And What is the FDIC doing to meet this shortfall?

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said.

The fund, which lost $33.5 billion in 2008, was drained by 25 bank failures last year. Sixteen banks have failed so far this year, further straining the fund.

Any takers that this won’t be a “one-time” thing?

What should YOU do?

I don’t have all the answers, but what I’m doing is making sure that funds are spread across several banks. If you have a very large amount of money in one big bank, it’s best to spread it around. Even if you have a small amount of cash, stay informed about your bank's operations, especially if it's a big bank.

(Cross-posted at Swords Crossed, Facebook, and Wealth Weekly).

Will You Be OK If Your Bank "Fails"?

If you haven't heard, a major West Coast bank IndyMac has been taken over by the government. There has been a small panic as many customers made a "run" on the bank--meaning they withdrew large amounts of money at once. Most banks cannot sustain such a large withdrawal amount over a small time period.

Not long ago, when banks failed, they went away. In today's age, the government tries to stem public panic by taking over the bank when it fails. Usually the FDIC (Federal Deposit Insurance Corporation) sends officials to assume the roles of executives (like CEO, CFO, etc) until the government can find another bank to purchase the assets of the failed bank.

You may be familiar with the FDIC--this is a government-run insurance corporation. Usually they have a sticker on the outside of your local bank, assuring that your accounts are insured up to at least $100,000. If you have an IRA (Individual Retirement Account) the government bumps it up to $250,000. There is also a lesser-known SIPC (Securities Investor Protection Corporation) which insures any stocks, bonds, CDs, etc up to $500,000.

So what does all that mean to you? Well..

It's time for this weeks episode of 'What Do We Learn'?

SCENARIO 1
Let's say you have $400,000 in cash in one account at JustTrustUs (JTU) Bank. If you're a regular reader here I don't know why you'd do that, but follow me. If JTU fails and is taken over by the government, how much money would you get back?

If you got the same deal the IndyMac customers got, you'd get $100,000 + 50% of the balance--in other words $100,000+($400,000-$100,000)*0.5 = $250,000. So you won't be starving, but you'll be out $150,000, which is nothing to sneeze at.


SCENARIO 2
Let's say that instead you take your $400,000 in cash and take half of it out of JTU bank and you deposit it into GiveusSome (GUS) Bank across the street. Now you have $200,000 each in JTU and GUS. Now what happens?

If only one bank fails (JTU):
JTU (failed) will give you 100K + (200K-100K)*0.5 = 150K
GUS (OK) will still have: 200K
You now have 350K!

If both fail:
You'd have 300K (through similar math).

So basically, you save 50-100K of your money by simply splitting. Not bad, but you can see where we are going here. If you have large amounts of cash and don't want to invest it, never have more than 100K in one account in one bank. Spread the wealth across several banks. With securities that you have invested, you should talk to your account holder about splitting the account if you are worried that it will fail --but be assured that established national companies most likely (emphasis on most likely) will not fail.

What do we learn?
- Never keep more than $100,000 in cash in one bank.
- Be cautious when keeping millions of dollars in one mutual fund or IRA.
- And if you have significantly less than 100K, let alone in one bank..relax, you're insured.