January, 2010

Don't Count on the Federal Deposit Insurance Corporation (FDIC) to Fully Reimburse You in a Timely Manner if Your Bank Fails

Introduction

The Federal Deposit Insurance Corporation (FDIC) is a United States Government Corporation which was created by the Banking Act of 1933 (also known as the second Glass - Steagall Act) in the midst of the Great Depression. The FDIC was brought into being in an effort to protect individuals who had deposited their money into banks and then lost their money when banks closed their doors. Simply put, prior to the establishment of the FDIC on June 16, 1933, there was no insurance coverage for bank depositors.

Which Banks Have FDIC Insurance Coverage?

Every bank in the United States is not FDIC insured. You need to make sure that the bank you do business with is FDIC insured or, if not FDIC insured, carries some type of reputable insurance coverage. If not, you will probably lose everything in the event of a bank closure.

Currently the FDIC insures deposits at approximately 8,099 banking institutions holding about $13.2 trillion in assets. Look for the FDIC emblem in the bank window or ask your banker whether his/her banking institution is FDIC insured.

What Does FDIC Insurance Cover?

The FDIC insurance covers checking accounts, savings accounts, certificates of deposit (CD's) and retirement deposits.

The FDIC insurance does not cover mutual funds (stock, bond or money market mutual funds), annuities, stocks, bonds, Treasury securities and other investment products.

What Depositor Amounts Does The FDIC Insurance Cover?

As a result of the financial crisis which began in September, 2008 and continues today, the FDIC elected to increase its insurance coverage from $100,000 to $250,000 per depositor account until December 31, 2013 at which time it is supposed to revert back to the $100,000 figure.

Where Does The FDIC Get Its Funding?

The FDIC Deposit Insurance Fund (DIF) receives its funding by charging its member banks an annual premium which is based on the individual bank's insured deposits as well as the degree of risk that the institution poses to the insurance fund.

Reasons Why I'm Concerned About Whether the FDIC Will Be Able To Protect Its Depositors In The Years To Come

My reasons for concern are as follows:

1. the trend in the number of FDIC insured banks which have failed is on the upswing as demonstrated by the following:
   
   

   Year		Number of FDIC Insured Bank Failures
   2000		2
   2001		4
   2002		11
   2003		3
   2004		4
   2005		0
   2006		0
   2007		3
   2008		25
   2009		140
   2010		15 (Jan Only)

   
   The figures above tell the following story:
   
   
   1. we had almost as many bank failures - i.e. 25 - in 2008 as we had in the eight years from 2000 - 2007 - i.e. 27;
      
      
   2. the number of bank failures in 2009 - i.e. 140 - is almost three times the number of bank failures in the nine years from 2000 - 2008 - i.e. 52;
      
      
   3. the number of bank failures in 2010 is expected, by both independent analysts and FDIC management, to substantially exceed the 140 bank failures in 2009. As you can see, we had 15 bank failures in the first month of 2010;
      
      
2. the FDIC increased its 2010 budget to $4 billion from $2.6 billion in 2009 (an increase of 54% in dollar terms) and increased its staff (temporary and permanent employees) from 7,010 in 2009 to 8,653 in 2010 (an increase of 23% in headcount terms). You don't increase your budget and headcount by these amounts unless you expect to be dealing with a lot more bank closings;
   
   
3. the FDIC, as of September 30, 2009, had identified 552 banks with about $346 billion in assets as being on its "confidential problem list." If the FDIC admits to this many "problem banks," I can only imagine what the true number is. In fact, sources that I consider to be reliable, have estimated 1,000 bank failures over the next 2-3 years;
   
   
4. the FDIC Deposit Insurance Fund (DIF) fell to a negative balance of $8.2 billion as of September 30, 2009. This resulted in the FDIC taking the unprecedented action of forcing its member banks to prepay three years of premiums totaling $45 billion by December 31, 2009 so as to, hopefully, bring the insurance fund back into positive territory;
   
   
5. using the facts above, I want to demonstrate to you why you should be concerned about the FDIC's ability to adequately insure your bank deposits. The demonstration is as follows:
   
   
   

   FDIC DIP Balance as of 9/30/09	$<8.2> Billion
   Losses incurred by FDIC DIP on banks closed between 10/1 - 12/31/09	$0 - Not realistic but done for simplicity
   3 years of premiums paid by FDIC member banks on 12/31/09	$45 billion
   Other assets which FDIC claims to have and can be used to cover deposits in bank closings	$22.3 billion
   FDIC line of credit with U.S. Treasury	$500 billion
   Total FDIC resources available to cover deposits from bank closings	$559.1 billion

   
   
   The FDIC has approximately $559 billion (including a $500 billion line of credit with the U.S. Treasury which I believe is highly questionable) to cover $4.5 trillion in deposits in FDIC insured banks. Said another way, the FDIC's insurance fund can cover the following amount of bank deposits:
   
   
   1. 12.4% if the $500 billion line of credit with the Treasury is "real;"
      
      
   2. 1.3% if the $500 billion line of credit with the Treasury is, as I believe, a "pipe dream."
      
      
   I don't know about you, but that type of insurance coverage doesn't give me a "warm and fuzzy feeling."

Actions To Take

I would recommend that you consider the following items to protect you and your family:

1. Educate yourself about the financial health of the banks with which you do business. If the bank has a weak rating, consider moving your banking relationship to a stronger bank;
   
   
2. Make sure that you have some cash outside the "traditional banking system." This will be especially important in the likely event that a "bank holiday" is declared. President Franklin Roosevelt declared a "bank holiday" on March 5, 1933, the day after being sworn into office. Banks were closed for four days and all financial transactions were halted. By the time the banks re-opened for business on March 10, 1933, all insolvent banks had been closed permanently. I fully anticipate a "banking holiday" in the United States in 2010;
3. Rather than leaving too much cash in banks, consider buying extra supplies of non-perishable food, water and medical supplies, all of which I expect to be much more costly and scarcer as 2010 unfolds;
4. If you have spare funds to invest, consider buying "tangible items" with "real value" such as gold, silver, platinum and palladium coins. After all, the Chinese, "the oldest capitalists in the world," are openly encouraging their citizens to buy gold and silver coins while we are constantly being encouraged to buy a lot of worthless or semi-worthless "paper assets." Perhaps we ought to learn something from the Chinese who have accumulated a massive financial surplus while the United States has gone bankrupt.

In closing, I'd like to leave you with the words of several powerful individuals prior to and during the Great Depression of the 1930's:

"There is no cause to worry. The high tide of prosperity will continue."