| August 2008
Special Alert!
How To Find Out If Your Bank Account Is Safe
We are witnessing a wave of bank failures that will pick up steam in the coming months. For that reason, this letter will focus on only one subject: the safety of your bank account.
Most people don’t give their bank accounts a second thought. Ever since the Great Depression and the creation of FDIC-insured accounts, people have assumed that the money they have in the bank is safe. But times have changed and that may no longer be true in your particular case.
With recent media coverage of the Summer Olympics, the Russian-Georgian war, the Democrat and Republican Conventions and the coming Presidential election, the banking crisis has been pushed to the back-burner. But the crisis is about to get worse. We don’t want you to be caught in what may be a rather frightening storm, so please read this letter carefully.
To put the problem in perspective, 2005 and 2006 saw no bank failures. In 2007, there were three. Through 7/31 of 2008, there have been five, including the well-publicized IndyMac failure. The other four were First Integrity Bank, ANB Financial, Hume Bank and Douglas National bank. While these four were smaller banks, IndyMac, though not well-known in the Northeast, was a bigbank.
While most of the coming failures are expected to be small to medium sized banks, rumors are circulating that one of the big investment or commercial banks may go belly up. Rather than speculate or wait until the other shoe drops, read the following carefully NOW. If appropriate, take action immediately. You don’t want to lose money that you thought was sitting safely in your bank account.
Will FDIC insurance protect me?
What about FDIC insurance? Rather than explain or interpret how FDIC insurance works, we have provided an important section of the FDIC website. You’ll find it below. It should help you to understand whether and how your bank account is insured..
As most of you know, the FDIC, or Federal Deposit Insurance Corporation, was established during the Great Depression. Thousands of banks failed in the early 1930’s and hundreds of thousands of Americans lost their savings. In order to re-establish confidence in the banking system, the government created the FDIC to insure bank accounts.
Since 1991, the FDIC has functioned similarly a mutual insurance company. It levies premiums on member banks. When a bank fails, it uses the premium dollars it has amassed to pay off depositors up to the limit of the insurance coverage, currently $100,000. Amounts in excess of $100,000 held in bank accounts are not insured.
Please note that CD’s are bank accounts. CD’s are only insured up to $100,000, whether you hold them at your bank, or, for some of you, in a brokerage account. Remember that if you have a $100,000 CD and your bank fails, you will get your $100,000 back, but not the interest on your $100,000. Why? Simply because the interest brings the total to more than $100,000. If you have a CD worth less than $100,000, you should receive the principal, plus the interest you’ve earned, as long as the total does not exceed $100,000.
When IndyMac, a rather large Midwestern bank, recently failed, it was announced that people with bank accounts over $100,000 would receive only fifty cents on the dollar. People complained, but, frankly, they were lucky to receive anything.
You may wonder why you can’t get your money out of the bank if it goes belly-up. After all, you are a depositor. Shouldn’t you have first access to the assets of a bank that fails?
First of all, most people are unaware that depositors are creditorsof the bank. The bank does not put your money into a vault with your name on it. When a bank fails, you have to line up, like all creditors to any bankrupt company, to get your money. And you are not at the head of the line.
The Fed, the regulator of banks, stands at the head of that line. If the bank has borrowed any money from the Fed’s discount window, the bank’s assets were used as collateral. After the Fed comes FHLB (the Federal Home Loan Bank), as well as numerous state and local government funds.
The Fed then looks to pay off all FDIC insured accounts with remaining assets. Remember the FDIC insurance only kicks in after any liquid assets are used to pay for the insured accounts. If there aren’t enough liquid assets available to satisfy the insured accounts, the FDIC has to step in and provide money from its insurance fund. The FDIC then expects to get paid back from any remaining assets of the bank before any uninsured depositors. The uninsured depositors will get paid before any of the bank’s bondholders or shareholders. But you can see that you will be standing in a rather long line before anyone thinks of you.
Is your bank on the FDIC’s “Watch List”?
There are around 8,500 banks in the U.S. About 90 are on the FDIC’s “watch list.” We don’t know who is on the watch list. It’s a secret. Why? If we knew there might be a run on those banks. It’s also important to know that IndyMac was not on the FDIC watch list before it failed.
So where does that leave you and your bank? Read the text below from the FDIC’s own website. You can also do some due diligence on your own by going to the following website:
www.institutionalriskanalytics.comThey provide in-depth analysis of banks and other corporations. You can get a pretty detailed analysis of your individual bank for around $50.
I heard the FDIC doesn’t have enough money to cover potential losses.
Should I worry about this?First of all, the FDIC most definitely does not have enough money to cover all the potential losses out there. Because of this, it would behoove to government to clearly state that it will come up with the funds needed if the FDIC should run out of money (and it’s hard to imagine that they won’t!). By not addressing this now, the government’s inaction will probably create a lot of unnecessary anxiety. We say “unnecessary” because we find it hard to believe that ultimately they won’t step in and cover the insured accounts once the FDIC runs out of money. It’s not something the government has stated that they would do no matter what, but they’ve done it before. Besides, the outcry would be so overwhelming that, if necessary, Congress would have to step in.
(Of course any government bail-out of the FDIC will add to the money they have “printed” and will continue to “print” in the future to save our shaky banking system. In the long run, the result will be further deterioration of the dollar. But that’s a story for another time.)
Now, read through the following from the FDIC’s website.
The following is excerpted from the FDIC rules:
How much insurance coverage does the FDIC provide?
The basic insurance amount is $100,000 per depositor, per insured bank.
The $100,000 amount applies to all depositors of an insured bank except for owners of certain retirement accounts, which are insured up to $250,000 per owner, per insured bank.
Deposits in separate branches of an insured bank are not separately insured. Deposits in one insured bank are insured separately from deposits in another insured bank.
Deposits maintained in different categories of legal ownership at the same bank can be separately insured. Therefore, it is possible to have deposits of more than $100,000 at o8/31/2008ne insured bank and still be fully insured.
The following sections describe the eight ownership categories recognized by FDIC regulations and the requirements that must be met to have coverage beyond the basic $100,000 insurance amount.
Single accounts: A single account is a deposit owned by one person. The following deposit account types are included in this ownership category:
| Accounts held in one person’s name aloneAccounts established for one person by an agent, nominee, guardian, custodian, or conservator, including Uniform Transfers to Minors Act accounts, escrow accounts, and brokered deposit accounts
Accounts held in the name of a business that is a sole proprietorship (for example, a “DBA account”)
Accounts established for a decedent’s estate, and
Any account that fails to qualify for coverage under another ownership category. |
All single accounts owned by the same person at the same insured bank are added together, and the total is insured up to $100,000.If an individual has a deposit account titled in his or her name alone but gives another person the right to withdraw deposits from the account, the account will be insured as a single account only if the insured bank’s deposit account records indicate that:
| The other signer is authorized to make withdrawals pursuant to a power of attorney, orThe account is owned by one person, and the other person is authorized to withdraw deposits on the owner’s behalf (for example, a convenience account). |
If the insured bank’s account records do not indicate that such a relationship exists, the deposit would be insured as a joint account.Single Account Example:
| Account TitleMarci Jones
Marci Jones
Marci Jones
Marci’s Memories (a sole proprietorship)
Total Deposits
Amount Insured
Amount Uninsured |
Deposit TypeNOW
Savings
Checking
|
Balance5,000
20,000
100,000
25,000
150,000
100,000
50,000
|
Explanation:Marci Jones has four single accounts at the same insured bank: three accounts held in her name alone and one account held by her business, which is a sole proprietorship. Deposits owned by a sole proprietorship are insured as the single ownership deposits of the person who owns the business. Thus, the deposits in all of these accounts are added together, and the total balance, $150,000, is insured for $100,000, leaving $50,000 uninsured.
Don’t wait until it’s too late. Take action now to make sure your bank accounts are safe!
We encourage you to take any appropriate action to secure your money. Even if the coming wave of failures does not develop into a tsunami, you don’t want to be the one left holding the bag. Be prudent. If you’re still not sure what to do, please feel free to call us.
Next time, we’ll settle down and get back to a more normal format, which should include “3 Problems with 401k’s That Almost No One Talks About.” Again, if you have any questions about today’s letter, or are unsure about how safe your bank accounts are, you can call us at 212-907-6583, or, if you prefer, email:resposito@lighthousewm.com
Wishing you a Happy Labor Day,
Rick
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