March 4, 2009

FDIC Letter Threatens FDIC Insolvency - This is Big News But What Does It Mean to You?

Today, there was big news that maybe isn't getting the attention it deserves: the head of the FDIC has sent a letter to banks and thrifts across the country, explaining to their CEOs that the FDIC must raise its fees, as well as be paid the big surprise extra premium payment that it voted for itself last week, otherwise the FDIC will become insolvent in a matter of months.

That the FDIC is even hinting that it may be insolvent at any time is spooky stuff, and I'm thinking more than adequate to start some folk on a run to their banks.


Why is this really big news to you?

Because the FDIC (Federal Deposit Insurance Corporation) protects the accounts of most financial institutions in this country - meaning, when you go to the bank and want to withdraw your cash and the bank doesn't have it, it's not like the Great Depression. Back then, if the bank didn't have enough cash to give to its creditors, then it had to shut its doors.

Voila! The FDIC, today, acts like the cavalry, or the Good Witch in a pink dress, or whatever image suits you best.

If the bank doesn't have the cash to meet the depositor demand, then the FDIC steps up and provides the moola. Whew. And, just because the FDIC is there, in the background, everybody feels safer.

In fact, financial advisers everywhere traditionally advise their folk to check and make sure their accounts are in FDIC-covered banks. And, if they've got over $100,000in an account ($250K at the max - depends on the circumstances), then create a second account. The FDIC insurance sets a limit/account so rich folk will have lots of accounts to make sure their bucks are all FDIC-protected.

What's the big deal about the letter? Well, the banks and thrifts are balking at paying the FDIC what it's requested.

Letting all of us know about this letter might be spin and it might be push. Maybe it's both.

Because the 8305 banks and thrifts across the country that got this letter aren't wanting to pay the FDIC this new annual premium in September (20 cents on every $100 on deposit, up from 6.3 cents last year) and they don't want to pay the extra 2 cents per $100 in deposits in regular premiums, which starts next month.

The financial bigwigs are saying they're already strapped and this is just too big a burden. Smaller community banks are saying they're running so close to the edge that this FDIC requirement will shut them down. They'll fail if they have to pay the FDIC what it's demanding.

Releasing this scary letter puts pressure on all these 8305 FDIC-member banks to confirm to the agency's request. No one wants a bank run.

What if the FDIC doesn't get what it needs? They call the US Treasury. Or Maybe the Taxpayer.

That's right. Currently, if the FDIC needs extra cash and doesn't have it, then the protection in place is via a $30 billion line of credit with the U.S. Treasury. There's pending legislation to up that amount to $100 billion.

And, there's talk that the FDIC might have to ask taxpayers for some cash - but everyone's claiming that they're just joshing when they discuss this option.

What does this mean to you?

The FDIC is telling everyone who'll listen that they are expecting a lot of bank failures in the next year or two, and they need to be ready to deal with that possibility.

They aren't even hinting anymore - they put it in their March 3rd letter.

So, the reality is that the FDIC is expecting banks to fail and needs cash to cover those deposits when that happens.

How safe you feel about the cash in your bank is something that you need to consider. But you can't just assume that the old "FDIC Insured" is the rock-solid protection that it was back in the good old days.

And those fees the bankers are whining about? We all know they'll just get passed on to the consumer. Tax us or bill us, we're gonna pay for this.

Don't be scared. Be prepared. Think before you act.

Consider carefully before you pull money out of your account. Where's it going to be safe?

Simple living means not thinking like the lemmings. So ponder all of this.

1.How many dollars should you have on hand, safeguarded, if banks were to fail? Where's that cash going to be safe from fire and theft? Buried in the backyard, holed up in a household safe?

2.Bank runs are a major big deal, we all know this.

Maybe the big fat rat here isn't the manipulation of the bankers to pay the fees, it's the segue to our acceptance of the larger banking fees we'll all be facing soon.

Finally, for a laugh, go read the September 2008 FDIC press release by Andrew Gray, Director of the FDIC's Office of Public Affairs. Talk about spin.


Sources:

Associated Press
http://www.google.com/hostednews/ap/article/ALeqM5gv3IJ-X4AJ-eO5sSEq0_QIz7NWogD96NC25O2

Bloomberg
http://www.bloomberg.com/apps/news?pid=20601087&sid=alsJZqIFuN3k&refer=home



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