IndyMac Failure - Test of FDIC Insurance

IndyMac Bank failed (click here for official info), and now we have a high profile test of FDIC insurance.

In the past, I’ve hinted at the likelihood of bank failures and my concerns about the sufficiency of funds at the FDIC. Usually, I got comments that I was fearmongering, that I had no evidence and all kinds of ignorance that doesn’t hurt whatever feelings I have(click here for a sample). And to anyone that has toughed out listening to me over the past year or so, they got their dose of doomsday talk which often included my warning that they better understand the FDIC coverage.

So now the IndyMac story is sensational enough that the “real media” is getting clued in to discuss the protection limits of FDIC. Good for them. I doubt people listened to my warnings and I am hopeful that they’ll listen to someone…even if it’s CNBC. As for the 10,000 or so depositors at IndyMac that are uninsured to the tune of $1 billion - sorry. I am sorry. But you are not alone. There are many more people who are uninsured above the FDIC limits all around this country’s banks. IndyMac’s percentage of $1 billion uninsured against approximately $19 billion in total deposits is only 5%. According to the FDIC, about 38% of approximately $7 trillion in US deposits are not insured. That number was 32% in 2002 and 23% in 1994 - that’s right, as time has gone on, less people were making sure they were insured. And so let’s be real - most of the ignorant depositors will remain that way regardless of whether they hear this story. It’s just the way it goes and I have a suspicion that the FDIC likes it that way.

Can you just imagine what would happen if everyone who is above the FDIC limits listens to the media’s public service announcement and strategically positions their deposits so every penny in banks is covered? Think about it. Think what happens to banks that are relying on these uninsured deposits for cheap financing if they are reallocated to another bank down the street. Are we sure that all banks will get a perfect balance of new insured deposits in exchange for the uninsured deposits they lost? Is it impossible to imagine a run on banks caused by everyone trying to avoid the consequence of a run on banks?

Up until now, the FDIC has claimed it had sufficient funds to cover its insured deposits and FDIC Chairman Sheila C. Bair has proudly said “Since we began insuring banks in 1934, not a single depositor has lost a penny of insured deposits.” As for the uninsured deposits, Barr has claimed that 72% of their money has been recovered over the past 15 years. You might want to check recent failures like NetBank or Miami Valley Bank to see how much uninsured deposits have been recovered lately. As things get worse, I expect this number to drop far below the 72% average Bair mentioned.

The financial statement of the FDIC indicates they have about $52 billion in the fund so I’ll use that number. Regulators have said that the IndyMac failure would hit the fund for about $4 billion to $8 billion. Even at the lower level of $4 billion, the fund is depleted pretty significantly. What if everyone goes out and makes sure 100% of their money is spread out at enough banks so it is 100% insured by the FDIC? If the FDIC fund of about $48 billion (net of IndyMac’s loss) is sufficient to cover about $4 trillion in deposits, can the same be said if the fund suddenly has to cover $7 trillion?

Comments

[hanumanj:]

A quick compounding of inflation at just 3% for the past 75 years shows that $100,000 in 1933 dollars is almost $1million in today's dollars. So, the FDIC provides just 10% of the insurance that it was originally chartered to do -- just one more indication of the Great Unwind of the finances of the US Government. And after the world wakes up and starts selling our dollars, the US will be worth even less.

2008 Jul 15 07:54 AM

[ncbill12:]

"less people were making sure they were insured. And so let’s be real - most of the ignorant depositors will remain that way regardless of whether they hear this story."

I just helped a relative yesterday move their insurance settlement (well over the $100,000 limit) to a different bank, the latter which participates in cdars.

The cdars program spreads out up to $50 million to different banks so the entire amount is covered under FDIC insurance:

www.cdars.com/why-cdar...

The bank I moved it from (non-cdars) was not pleased.

2008 Jul 15 10:01 AM

[Financial C...:]

Yes, there is no doubt that FDIC could run out of funding as more and more banks fail. So what happens then? Print more money. The U.S. dollar will be worthless in a few years.

2008 Jul 15 01:55 PM

[failed fdic...:]

I have a vague feeling that FDIC is not here to protect the interests of depositors. I am one of the 10,000 uninsured depositor and if I have known that there is a limit on FDIC insured deposits then I would have done something to protect my deposits. I have a substantial loss considering my life situation. After reading this article my hunch about FDIC's motive of not informing the public on how FDIC insurance works to protect the uninsured deposits validates that their mission statement to protect the depositors is incorrect. Their mission statement is to save the deposits for the bank not the depositors. It is a shame that a government entity will deliberately mislead consumers for their own interests. Probably there is no reason for people to work hard and save for their future if the government has no interest in protecting those hard-working citizens. You work hard, you pay taxes on your earnings, you save, you pay taxes on the interest and then you lose your money that you thought is secure because the government entity fails to educate and protect you. It is a shame. Probably I'll just quit my job and depend on Uncle Sam to support me.

2008 Jul 22 10:34 AM