What is the Purpose of the FDIC?

The FDIC is the Federal Deposit Insurance Corporation. It was created by the Glass-Steagall Act of 1933. It insures up to $100,000 per depositor per bank. Runs on banks are nothing new. When there were economic downturns and high unemployment in the 19th century there were runs on banks. There was a particularly severe panic in 1893. A national bank guarantee fund was
proposed. Although deposit security measures were adopted at the state level, the federal government chose the Federal Reserve System as a lender of last resort.

In 1933 the system failed and 4,004 banks closed. Under the federal government’s supervision, these banks were merged into stronger banks.

President Franklin D. Roosevelt was personally opposed to insurance because he thought it would protect irresponsible bankers, but yielded when he saw Congressional support was overwhelming.

On March 31, 2006, two FDIC funds were rolled into one called the Deposit Insurance Fund (DIF). The banks pay an insurance premium into the DIF based on both the balance of insured deposits as well as on the degree of risk the institution poses to the insurance fund.
(Historic information was obtained from Wikipedia.)

When IndyMac Bank failed in July 2008, it costs the FDIC upward to $8.9 billion. Due to the failure of IndyMac and other banks, the funds reserve ratio fell below the 1.15 percent that is required. When that happens, the FDIC is required to develop a restoration plan to replenish the fund, which is expected to involve requiring higher contributions from banks which deal in riskier activities.

Insured Items

• Checking Accounts including Money Market Accounts (but not money market funds)
• Savings Accounts
• Certificates of Deposit (CDs)
• Outstanding Cashier’s Checks, and interest checks

Non-insured Items

• Stocks, bonds, mutual funds, money market funds
• US Treasury securities
• Safe Deposit Boxes
• Losses due to theft or fraud at the institution (usually covered by special insurance policies)
• Accounting errors (there may be other remedies for these)
• Insurance and annuity products, such as life, auto and homeowner’s insurance

If your bank fails, there is a page on the FDIC website where you can enter your account number the first business day after the failure to see if your account is fully insured. This service became available after July 1, 2008 and there are already 7 banks in the list.

Is My Money Safe?

In my opinion, NO. But don’t start a run on the banks. That just makes it worse. We had a run on gas here in Florida because of hurricane Ike, which led to gas prices being jacked up and gas stations running out of gas. What I suggest is that you have enough cash on hand to get through at least a week or two. I don’t know how long it takes to get your money from a bankrupt bank, hopefully not too long. However, I can’t help but wonder what happens when the FDIC runs out of money.

Two banks that I heard are currently struggling are Washington Mutual and Wachovia. If I had an account in either of these, I would be moving it. But they will surely fail if you start a run on them just because you read this hearsay.

The main thing to do right now is not have more than $100,000 in any one bank. Even if you don’t have that much, I suggest you have money in two different banks.

In Summary

It’s going to be a bumpy ride for a while. The best thing that you can do is get your own finances in order. If you can afford it, invest in some gold.

Lehman Brothers Holdings and Merrill Lynch were investment companies. The 158-year-old Lehman Brothers fell under the weight of $60 billion in soured real estate holdings, and the credit market’s dislocation. Other repercussions of Lehman’s failure will be the employees who are out of work, and the non-profit organizations that Lehman’s foundation supported.

The AIG Insurance company is also on the rocks. I’ve also heard rumors that Goldman Sachs isn’t as well off as they put on. They are announcing their earnings before the market opens on September 16, 2008. We’ll see what they say.

The FDIC is not involved with any of these companies that I mention here since they are not banks.