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FDIC - It's not what you think it is...
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FDIC insurance also may not be what you think it is. As an insurance program, it was a very good idea for the protection of depositors. As an insurance company run by the government, the rules that apply to private insurance companies are not applicable. For example, private life insurance companies in the US are required to have assets or deposits equal to 102% of their liabilities. This means if an insurance company has 10 clients, each with a $100,000 life insurance policy, they must by law set aside or prove that they can pay the claims of their clients ~ stated another way ~ 102% of one million dollars. If you think that the FDIC has liquidity right now to pay off the depositors in the event that say just 15% of all US banking institutions failed next week, think again. This is not an attack on the FDIC program. Again, it was a good idea, but it is more of a psychological security blanket than a financially sound reality. Since you read your life insurance or other policy to know your coverage, why not read the FDIC insurance policy from your local bank. As a depositor, you have the right to see the policy and read it. It is almost guranteed that most people do not. If more people did read it, I am sure when investigating offshore banking ~ they would not ask if an offshore jurisdiction had FDIC coverage ~ but instead ask if the banking requirements from a particular jurisdiction are in fact better.
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I think most Americans really have no idea what FDIC is or how is works. Also, many Americans always want to use FDIC as a point of reference with regards to safety of banks or banking outside of the US. However, the reality is that FDIC is an illiquid insurance company (if it were a private insurance company, it would be broke and unable to provide the insurance vs. claims) and I dare to say, a PONZI scheme as well. In addition, even though other countries do not have the exact same kind of system in place, they might have another, which actually guarantees a higher level of solvency for the banking system in its own country than what FDIC provides in the US. For example, as of March 2002, the bank insurance fund only has US$1.24 to cover each US$100 of insured deposits. So, if you want to make a comparison perhaps to the Dominican Republic, whereby the Central Bank requires that banking institutions post reserve requirements ranging up to 20% (for certain kinds of unsecured loans, such as outstanding credit card balances), the reality is that the Central Bank of the Dominican Republic has perhaps up to 10 times the reserve deposits and coverage that FDIC has (taking an average).
. The following chart taken directly from the FDIC website indicates that the Bank Insurance Fund ONLY has 1.24% coverage and that this is in fact below the 1.25% minimum reserve ratio THEY have established (so they are below their own minimum guidelines). In short, how well do you feel knowing that the FDIC can only payout US$1.24 for each US$100 you have on deposit with your local US bank (should your bank go under)? Only you can answer that, but I certainly am not thrilled about it.
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[link to www2.fdic.gov]
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Also, we have talked about a very real banking crisis once again in the US, and the numbers do not lie. The following chart was revised June 12, 2002 and highlights that bank failures are once again on the rise after leveling off from the last banking crisis in 1999. In fact, the following chart indicates that 6 banks have already failed this year, and that 124 are in crisis (or are having financial difficulty). Of this total (6 that have failed plus the 124 in crisis), the total assets of these banks are, US$54 Billion Dollars. By the FDIC’s own accounts, they only have US$30 Billion in the fund as of MARCH 2002 (plus an additional US$11 Billion is the Savings Bank Fund, bringing the grand total to US$41 Billion). Therefore, if we take for granted that this small number of banks and financial institutions out of 9,000 something covered by FDIC end up going south, the FDIC insurance fund is once again bankrupt, as it was in 1995. In other words, if one assumes that FDIC might have to bail out ONLY 130 banks as of TODAY, and pay off US$54 Billion Dollars to depositors, with only US$41 Billion in the kitty, you can do the math. Interestingly enough, this is a small number of the total 9,000 something institutions guaranteed by (or supposedly guaranteed) by the FDIC. So, 130 banks go under, FDIC is wiped out (again), which leaves no money for the deposits in the remaining 9,000 banks, credit unions, etc.
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[link to www2.fdic.gov]
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The additional written commentary about the state of banking in the US, for the first quarter ending March 2002 is here as well (written by the nice folks at the FDIC themselves).
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[link to www2.fdic.gov]
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Bottom Line, how do you know your money is safe with FDIC? The honest answer is, FDIC is yet another US government run program that is broke, but there is always the US taxpayers who can bail them out (again). Meaning, many say, the US government would never allow the FDIC to go on without money – which is probably an accurate assumption to make. However, we are talking about what is a PONZI scheme in such a case (which is supposedly illegal for everyone else, except the US government). Few will listen,
Of the few who listen, fewer still will understand,
Understanding does not mean believe,
Of the handful who believe, most may not know what to do,
Those who even know, how many will actually do ?
And the rare ones who have done it.......
Need not listen to you anymore.
The following chart taken directly from the FDIC website indicates that the Bank Insurance Fund ONLY has 1.24% coverage and that this is in fact below the 1.25% minimum reserve ratio THEY have established (so they are below their own minimum guidelines). In short, how well do you feel knowing that the FDIC can only payout US$1.24 for each US$100 you have on deposit with your local US bank (should your bank go under)? Only you can answer that, but I certainly am not thrilled about it.<<<<<<<
FINALLY someone found the link for this little tidbit. I have been sayin' for years ain't no way the FDIC can cover a systemic failure of the banking system.
Anonymous Coward User ID: 302272 9/28/2007 10:57 PM
Can you count on the FDIC?
Mar 30 '01 (Updated Mar 31 '01)
The Bottom Line Is the FDIC really safe? Or could it be an illusion? An objective look.
Brief History of Banking
It started when people started lending each other money on an individual level. Think of you lending money to a friend after you went to a movie, that is really where banking started.
However, it quickly became clear that not many individuals could lend people the large amounts of money needed to do big, important things. Imagine if a friend asked you for a loan so they could buy a house, build a nuclear power plant, or mine a mountain. First, you would not be able to muster such a large amount of money; second, you would not be able to comprehend the risks and potential benefits of such operations, and the cost of collecting the money would be too great to make it worth it. This is the reason banks where created, to have an institution that could lend a lot of money and to have an institution that could mitigate risks associated with loans.
People are willing to pay a bit for this risk aversion. That is the difference between the interest that the bank pays you and the interest that the bank charges you for a loan.
The banks, acting quite logically, loaned money to people as soon as people deposited money so the money was working for the banks. People used the loan money to buy houses, cars and factories, which spurred the economy and, in turn, caused an increase in the amounts being deposited.
Unfortunately, this only worked while the economy was going well. When the economy turned down, factories could not repay their loans fast enough. People panicked that the banks would not have enough money to pay back their deposits. They quickly rushed the banks in search of their deposits. Trying to raise money; the banks would call in their collateral and sell them. However, this sudden infusion of supply of property caused the price of property to plummet, leaving the banks with too little money to pay back their depositors, and left the economy worse off. Ironically, depositor's worst fears where realized simply because they feared it.
To increase depositor confidence and to avert risk further, banks started buying insurance for their accounts. This worked for a short while. However, after it became clear that insurance companies where invested in the same properties that the banks where, people lost confidence and insurance became meaningless.
This caused a fair amount of banks to go out of business each time the economy took a dive.
However, when the great depression struck in 1929, the situation was simply horrible. Over 31,000 banks went out of business in a single year. That is where the FDIC started.
FDR, the Depression and the FDIC
FDR, seeing that the collapse of capitalism was quite possible, ordered that banks take a few federal holidays. During this time, banks where allowed to reorder their finances, sell assets without panic, and restructure their debts. The act was sufficient to prevent collapse, but both the congress and president saw the need to have systemic reform in the banking system.
In 1933, with the Banking Act, congress created a federal corporation to insure all banks. The Federal Deposit Insurance Corporation (FDIC) was created. They acted as an insurance agent to all banks, insuring up to $2500 dollars per account. The insurance company, which every bank had to be a member of (Credit Unions and Saving and Loans are exempt and are covered under other laws) became the both the insurer and regulator of banks. They made sure that banks do not overextend credit, forced banks to have cash on hand and forced rigorous checks on the banking system. Most of all however, it increased the confidence that ordinary people had in the banking system. They where assured that their deposits where insured and that bank runs would be a thing of the past.
Perception vs. Reality
The perception of the FDIC is that the federal government is insuring all bank accounts, and that even if there was a panic, the feds will bail people out.
So why worry?
Simply put, this perception is based on incomplete facts. First of all, the federal government DOES NOT guarantee bank accounts. That is an absolute myth. The Federal Deposit Insurance Corporation insures bank accounts, and they are not a federal agency, although they are a federal corporation. What's the difference? It is the difference between federal backing and no guaranteed federal backing. Secondly there is a belief that the FDIC makes it impossible for banks to fail because they regulate all the loans that are owned. While it is true that the FDIC strictly monitors loans, this protects from excessive lending, it does not protect from a sharp decline in the economy that causes loans to go unpaid. Thirdly, there is a myth that the FDIC can bail everyone out if need be. At most the FDIC can bail out 1/12th of deposits at any one time. Combined with reserves that banks have and assuming failing banks can be sold to other banks, the most that can be baled out is 1/5th.
So that is the reality. Without taking drastic steps such as selling all collateral, which would make the economy even worse, that is the most that can be bailed out at any one time.
Why We Haven't Had A Collapse of Capitalism
We have had serious economic shock and recession during the 60 years after the Great Depression. Why haven�t we seen bank runs and massive panic when such a thing occurs?
It has to do with confidence and expectations. Bank runs occurred because they where expected to occur, it was a classic self-fulfilling prophecy. People became scared that their money was at risked, rushed banks to withdraw money, and in turn caused the bank run they where afraid of.
This is no longer expected. People no longer expect bank runs when there is a recession, so they no longer feel the need to rush the banks. They are confident that the FDIC will save them, and (possibly wrongly, probably correctly) assume that the federal government will save them if things get really bad.
It's the Confidence Stupid
That's really all it's about. The FDIC cannot possibly save everyone's bank account. But as long people believe that they can, and no one will test this conviction.
The danger is if people doubted the FDIC's ability to save them when a massive recession hits, that may reintroduce us to the days of bank runs and panics.
Just a Note
In the US, barring nuclear war, massive bio/chemical attack, there is a very small likelihood that we would have another Depression like situation. The FDIC and the federal government are extremely vigilant about the economy (not to mention Wall Street), so it is doubtful that the FDIC will fail. Personally, I feel the FDIC is doing a fine job and any major fear, I believe, would be irrational. This article was just pointing out some possibilities. Also, the FDIC has raised the insurance limit to $100,000 in recent years.
[link to www.epinions.com] Few will listen,
Of the few who listen, fewer still will understand,
Understanding does not mean believe,
Of the handful who believe, most may not know what to do,
Those who even know, how many will actually do ?
And the rare ones who have done it.......
Need not listen to you anymore.
I didn't have to read that to know FDIC can't cover it all. People thought the same about the FSLIC in the 80's .Silverado S&L run by Neil Bush (big shock,a Bushie that can't control money) and Charles Keating running Lincoln S&L were the downfall of that.
Buy lots gold and put it under your bed... Better yet forget the bed and just pile it up where your bed used to be and sleep on it.
You might find it is actually more comfortable then your mattress.
And if anyone comes and trys to steal it... Eat them!
You may find you will no longer have to leave your bedroom for a meal... Soon with rumours spread of your massive schatz pile food will continue to deliver itself practically into your mouth!
Alchemy Of Life/Love/Resurrection/Ascension: Connect To The Source(Of Love/Feelgood/Wellbeing Within), Breathe, Dream Your Highest Dreams and Experience The Bliss/Joy/Divinity/Ecstasy/Union/Heaven
if appropriate: take action to fulfill the dreams
Anonymous Coward User ID: 183770 9/29/2007 3:56 AM
In 1980, there was only one penny to cover every dollar on deposit. Since then, banks are piled high with derivatives, and should they go bust, 99c of your dollar is gone.
It would be wise to at least check out your bank or credit union star rating to see how safe it is:
In 1980, there was only one penny to cover every dollar on deposit. Since then, banks are piled high with derivatives, and should they go bust, 99c of your dollar is gone.
It would be wise to at least check out your bank or credit union star rating to see how safe it is:
All money is basically faith based. It is only as good as the faith people have in it. As long as we believe these little peaces of paper we carry have value they do, If enough people decide they do not then it does not matter what insurance you have they become worthless.
If we decide our money is worthless why would it matter if there is enough to go around?
Anonymous Coward User ID: 305163 9/29/2007 8:22 AM
It appears to me that your concern is not with the idea of the FDIC but with the concept of fractional reserve; that is, by design there's only enough money in the kitty to cover a very small percentage of banks which fail.
This is exactly the same as the deposit system, which states that there has to be only a percentage (and a small one) to cover the deposits actually in a bank.
And it's true: if everyone tried to withdraw their money from a bank at once, there simply wouldn't be enough cash to cover the deposits.
The same concept works in gym memberships, where gyms sign up way too many people to fit in -- if they all decide to show up at once to use the machines. But hey, it's no big deal, because the gym knows that more than half of the people will come for a couple of weeks then stop coming (yet are still required to make the payments).
And that's the way it is with the fractional reserve. The bankers assume that no more than a very small percentage of FDIC-insured banks will fail, and they assuming that only a very small percentage of people will want to withdraw their money at once.
In other words, they're playing the odds -- carefully calculated (we hope) by actuaries -- that their fractional approach will work.
And it has worked, ever since the 1930's.
It's kind of hard to argue with a record of success like that. Those western imperialist warmongers beat us to the Moon. Damn!
Anonymous Coward User ID: 203965 9/29/2007 9:59 AM
just take a look around, not very many parts of our government are working.
most are really big failures and we just don't care!!!
well a really big lesson in learning to care is about arise. If the rich think it won't affect them, good luck with delusional thinking.
Quoting: Anonymous Coward 203965
not very many parts of our government are working.
oh they are working on something
your money
just look at say HUD
it is illuminating to discover HOW MANY PEOPLE are living on the taxpayers dime
pensions, benefits, forever, their family.. that brother in law of the mayor back in the seventies.. you are still footing his bill
that uppity clerk at the dmv.. she and her children work for you
the secretaries that work for the directors and their assistant directors
the staffers and liasons
oh it is just unbelievable
all of them paper pushers
if they even touch paper anymore
and they will retire with benefits
Let's say bank 1 bets $1 trillion against bank 2. OK, bank 1 wins and collects as much as possible on bank 2 putting it into bankruptcy. Bank 2 customers pay the price and the taxpayer supports the FDIC to protect the customers.
Oh, by the way, the same person owns both banks... ^^ gravity is a harsh reality. ^^
Anonymous Coward User ID: 293826 9/29/2007 10:36 AM
it is illuminating to discover HOW MANY PEOPLE are living on the taxpayers dime
pensions, benefits, forever, their family.. that brother in law of the mayor back in the seventies.. you are still footing his bill
that uppity clerk at the dmv.. she and her children work for you
the secretaries that work for the directors and their assistant directors
the staffers and liasons
oh it is just unbelievable
all of them paper pushers
if they even touch paper anymore
and they will retire with benefits
WAKE THE FUCK UP
PEOPLE
Quoting: Anonymous Coward 275504
And your suggestion for what we wake up and DO is..............???
just take a look around, not very many parts of our government are working.
most are really big failures and we just don't care!!!
well a really big lesson in learning to care is about arise. If the rich think it won't affect them, good luck with delusional thinking.
not very many parts of our government are working.
oh they are working on something
your money
just look at say HUD
it is illuminating to discover HOW MANY PEOPLE are living on the taxpayers dime
pensions, benefits, forever, their family.. that brother in law of the mayor back in the seventies.. you are still footing his bill
that uppity clerk at the dmv.. she and her children work for you
the secretaries that work for the directors and their assistant directors
the staffers and liasons
oh it is just unbelievable
all of them paper pushers
if they even touch paper anymore
and they will retire with benefits
WAKE THE FUCK UP
PEOPLE
Quoting: Anonymous Coward 275504
Spare me your overt racism. Thats a nice illuminati talking point that no longer works as bright shiny object to distract.
Don't forget the corporate welfare (massive subsidies, tax breaks, no bid contracts for shoddy/incomplete work, wars of convenience for oil companies and munitions peddlers,
the PRIVATELY owned U.S. FEDERAL reserve providing welfare for foreign owned bankers,
and state welfare for foreign countries such as the biggest welfare queen of them all: Isreal.
YES, WAKE THE FUCK UP PEOPLE
Anonymous Coward User ID: 301225 9/29/2007 11:27 AM
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