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Thread: weekend commentary - the fine print on FDIC insurance

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    Default weekend commentary - the fine print on FDIC insurance

    With this week's 'run' on Countrywide Financial's California bank branches, and with some major worries in the money market account world, some natural questions arise in regard to FDIC insurance.

    If Countrywide (or any other FDIC insured US bank) goes under, do the depositors get all of their money back ? The answer is yes, up to a $100,000 balance

    How long could it take before the depositors actually get paid by FDIC ? The answer is up to SEVEN YEARS !

    If the FDIC payoff takes a long time, do the depositors get paid interest on the money they are 'owed' by FDIC ? The answer is NO there is no interest paid.


    Like any other 'insurance company', the FDIC doesn't have anywhere near enough assets to be able to pay off on 'claims' that start coming in at a rate that is 5 or 10 or 50 or 100 times normal. But unlike other 'insurance companies' the FDIC has the good ol' US taxpayer to fall back on if the amount of 'claims' exceeds the reserves/ability to pay them. This is the reason for the (up to) seven year delay. In the event of the failure of some really huge US bank, 'middle class' US taxpayers would wind up paying increased taxes over a seven year period, with the additional tax money being used to pay off their own FDIC claims, as well as the FDIC claims of other Americans who don't have to pay much in taxes.

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    Default Re: weekend commentary - the fine print on FDIC insurance

    And they only protect $500K, 100K cash, 400K invested assets.

    That's why FDIC protection sucks. Its just as good to have backing by the company and government. Perhaps one shouldn't be investing their assets at a bank/bokerage firm heavily invested in the CDO/hedge funds. Although its hard to get the exact numbers without a full fundamental analysis.

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    Default Re: weekend commentary - the fine print on FDIC insurance

    ^^^ a full fundamental analysis is basically impossible. The reason is that, since the S&L bailout some 25 years ago, even the 'safest' of banks and credit unions have been forced by regulators to 'lay off risk' by reselling their loans into the secondary market. But now the secondary market makers are the primary source of the risk !!! The secondary market makers are also the primary source of new funds for banks and credit unions to lend, because the vast majority of Americans don't save money and owe more money than they are worth. If banks and credit unions start taking increasing losses on mortgages / car loans / credit card balances, they are 100% dependent on the secondary market to 'eat' the losses.

    If the secondary market makers flake out, and the banks and credit unions wind up 'eating' the losses themselves, thanks to the miracle of fractional reserve banking, they'll run out of liquid cash in very short order. If that happens, no bank or credit union depositor will actually still have access to withdraw their funds in cash ... instead they'll get to file a claim with the FDIC and wait up to seven years in order to actually 'withdraw' those FDIC guaranteed funds from their account, earning zero percent interest in the meantime.

    ~
    Last edited by Melonie; 08-18-2007 at 04:43 PM.

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    Default Re: weekend commentary - the fine print on FDIC insurance

    Quote Originally Posted by Katrine View Post
    And they only protect $500K, 100K cash, 400K invested assets.

    That's why FDIC protection sucks. Its just as good to have backing by the company and government. Perhaps one shouldn't be investing their assets at a bank/bokerage firm heavily invested in the CDO/hedge funds. Although its hard to get the exact numbers without a full fundamental analysis.
    I am not trying to be a pain in the ass here really. I know there are alot of newbies that read these threads. I just want to make sure they understand what is being said.

    FDIC only insures deposit accounts, they do not insure any investments.
    The only amount they insure is $100,000 per account.

    http://www.fdic.gov/deposit/investme...tml#nondeposit
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    Default Re: weekend commentary - the fine print on FDIC insurance

    Awwwww fuck, I was thinking of SIPC. Dammit, it is time for me to do some continuing education for my Series7. Sorry, thanks for clarifying Vamp!

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
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    Default Re: weekend commentary - the fine print on FDIC insurance

    Quote Originally Posted by Melonie View Post
    With this week's 'run' on Countrywide Financial's California bank branches, and with some major worries in the money market account world, some natural questions arise in regard to FDIC insurance.

    If Countrywide (or any other FDIC insured US bank) goes under, do the depositors get all of their money back ? The answer is yes, up to a $100,000 balance

    How long could it take before the depositors actually get paid by FDIC ? The answer is up to SEVEN YEARS !

    If the FDIC payoff takes a long time, do the depositors get paid interest on the money they are 'owed' by FDIC ? The answer is NO there is no interest paid.


    Like any other 'insurance company', the FDIC doesn't have anywhere near enough assets to be able to pay off on 'claims' that start coming in at a rate that is 5 or 10 or 50 or 100 times normal. But unlike other 'insurance companies' the FDIC has the good ol' US taxpayer to fall back on if the amount of 'claims' exceeds the reserves/ability to pay them. This is the reason for the (up to) seven year delay. In the event of the failure of some really huge US bank, 'middle class' US taxpayers would wind up paying increased taxes over a seven year period, with the additional tax money being used to pay off their own FDIC claims, as well as the FDIC claims of other Americans who don't have to pay much in taxes.
    This goes back to our earlier discussion about the FDIC and NCUA. If this became wide spread I now see your point about how this could really hurt the FDIC. Yes they have the tax payers but even to recoup the losses from them will take time. Which means the FDIC would have to charge larger fees to instutions for their services. In turn the consumer would have larger fees and be hit twice for the FDIC's lack of over site.

    I think the NCUA has a better chance of not seeing huge fallout. Credit unions take on alot less risk than even small banks. If they even deal in the subprime markets it is done thru a third party.

    Your welcome Katrine
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    Default Re: weekend commentary - the fine print on FDIC insurance

    Which means the FDIC would have to charge larger fees to instutions for their services. In turn the consumer would have larger fees and be hit twice for the FDIC's lack of over site.
    Actually the consumer gets hit three times ... with the third strike being a tax increase to replenish the FDIC's reserves after financial institutions have failed. After all a failed financial institution does not pay FDIC insurance premiums or charge depositor fees.


    I think the NCUA has a better chance of not seeing huge fallout. Credit unions take on alot less risk than even small banks. If they even deal in the subprime markets it is done thru a third party.
    For starters, the NCUSIF has vastly smaller reserves than the FDIC. The failure of a handful of large credit unions could quickly wipe out NCUSUF's reserves.

    Next, Credit Unions are now required by the NCUA to make the same sort of investment type repurchase agreements, loan type repurchase agreements, and dollar price repurchase agreements that commercial banks do in order to 'lay off' risk onto a counterparty. Thus they are just as vulnerable to eating losses if the counterparty flakes out. And since they're dealing with the same counterparties as the banks for the most part, the risk of a counterparty defaulting on credit unions is essentially independent of credit union debt risk vs bank debt risk. The days of credit unions acting as 'self-contained' entities, holding their own mortgages in their own portfolios, supplying their own capital for new loans, investing surplus cash in Treasury notes etc. are now ancient history.

    see for some surprising stuff.

    (snip)"NCUA is proposing to permit the purchase of mortgage notes including those involving non-members, but only when the purchases are a part of an investment repurchase transaction. The Board recognizes the proposed amendment alters its earlier approach limiting the purchase of nonmember loans to those needed to complete a pool for sale on the secondary market.

    The mortgage loans underlying the note are not limited to loans made to credit union members. The second step in the transaction is the resale of the mortgage note or notes back to the counterparty. The mortgage note will take the form either of a trust receipt 2 or a
    participation certificate.3 The Board believes this second sale addresses the concern that the investment circumvents field of membership restrictions by requiring, as part of the transaction, that FCUs sell the mortgage note within a reasonably short period and will not continue to hold the underlying loans. This approach is substantially analogous to the current regulatory approach in the eligible obligations rule that permits FCUs to purchase nonmember mortgage loans to complete a pool for sale to the secondary market. 12 CFR 701.23(b)(1)(iv)."(snip)

    in other words, credit unions have been forced to buy up loans / mortgage paper from commercial banks and/or mortgage brokers in order to package these purchased loans along with their own member loans to resell the entire pool of mortgages into the secondary market. Thus the probability of the mortgage backed security going into default is contingent on the performance of non-credit union written mortgages as well as credit union written mortgages since the mortgages are pooled in the same security, and are thus independent of credit union mortgage risk vs bank/broker originated mortgage risk.

    Lastly, in a lot of cases the fate of a particular credit union is tied to the fate of its 'sponsor' ... which has typically been a big corporation or a big union or some other entity that isn't exactly well diversified in terms of regional economics or business / market segment. With all of the outsourcing taking place lately, it is very easy for particular credit unions to find themselves with 50% of their membership taking huge pay cuts while still attempting to make mortgage payments / car payments based on their former levels of income. Even the most diversified credit unions (i.e. neighborhood charters) are still tied to the ups or downs of regional economic conditions.

    I will agree that, in general, credit union management is typically more financially conservative than the management of corporate banks. However in a situation where a credit union is 'tied' to a US auto parts manufacturer, for example, no amount of good management is going to be able to avoid major problems when the majority of members have outstanding loans requiring $2000+ in monthly payments and their paychecks drop from $5000 a month to $3000 a month !

    Likewise, the co-mingling of risk between commercial bank and/or mortgage broker debt / mortgage loans and credit union debt / mortgage loans as a result of being forced to 'share' the same counterparties and the same secondary market now takes much of the risk management out of the hands of the credit unions' credit committees and/or boards of directors. Essentially, credit unions have been forced to 'go along for the same ride', and will likely share the same fate as the commercial banks and mortgage brokers if and when the resold securities based on co-mingled loans go into default and/or the counterparties flake out. In point of fact, credit unions who have purchased non-member loans and non-member mortgage paper for repackaging and resale into the secondary market may in fact wind up subsidizing the originating commercial bank or mortgage broker if and when when the credit unions are forced to buy back the co-mingled security due to the co-mingled non-member loans and non-member mortgages pooled within that security going into default.

    PS believe it or not I once held a seat on the board of a credit union (don't ask !). I wouldn't sit on the board of a credit union today if they paid me a million bucks !!! Unlike the board members of a commercial bank (who are well paid and anonymous), board members of credit unions are well known to the membership ... and very vulnerable to a lynch mob mentality if and when the 'infection' of toxic mortgage debt and/or outsourcing of high paying jobs comes home to roost !

    !
    Last edited by Melonie; 08-18-2007 at 08:03 PM.

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    Default Re: weekend commentary - the fine print on FDIC insurance

    "With this week's 'run' on Countrywide Financial's California bank branches, and with some major worries in the money market account world, some natural questions arise in regard to FDIC insurance.

    How long could it take before the depositors actually get paid by FDIC ? The answer is up to SEVEN YEARS !"

    This was six weeks ago. What a difference a month makes! Countrywide is adding 50 Milliion dollars a day in net deposits. It is in great shape again.

    And, if your bank would fail, the FDIC puts your money in another bank, and you have access to it in less than seven days, not seven years!

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    Default Re: weekend commentary - the fine print on FDIC insurance

    The FDIC is a blatant market intervention that should be eliminated immediately AND it makes a mockery of the word "insurance" because it is no such thing.

    The FDIC can only "save" a few banks anyway. In the event of a fairly large panic(a beautiful thing), it has only about .01% of deposits in its "fund." Of course, the Fed would inflate to cover the rest and take us happily into hyper-inflation.

    Bad banks should fail. There is no need for any kind of taxpayer and inflation-paid insurance scheme for them.

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    Default Re: weekend commentary - the fine print on FDIC insurance

    And, if your bank would fail, the FDIC puts your money in another bank, and you have access to it in less than seven days, not seven years!
    The FDIC can only "save" a few banks anyway. In the event of a fairly large panic(a beautiful thing), it has only about .01% of deposits in its "fund."
    In the recent cases of Countrywide and NetBank, the FDIC avoided having to pony up insurance settlement money because the FED allowed these troubled instutitions' accounts to be 'purchased' by other financial institutions ... with that purchase in turn having reportedly been funded by the Yen carry trade. If the Japanese central bank fails to hold down the exchange rate of the Yen, all of these carry trade loans will turn into money losers instantly.

    At that point, there won't be any 'private' investor money available for next to nothing (0.5% interest on Yen loans !!!) for bailing out these troubled banks. Instead the FDIC will have to pony up actual cash out of their own reserves to cover the insured accounts. And as Sh0t points out, current FDIC reserves couldn't even handle a 0.1% (one bank in 1000) failure rate without exhausting those cash reserves. At that point, FDIC insured depositors would be shoved onto a waiting list to receive their FDIC insurance settlement money - one that is potentially 7 years long.

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