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FDIC Deposit Insurance, Yet Another Bailout for Reckless Savers and Investors?

Personal_Finance / Credit Crisis 2010 Jun 29, 2010 - 08:31 AM GMT

By: Nilus_Mattive

Personal_Finance

Best Financial Markets Analysis ArticleWe all watched in horror as Washington bailed out failing financial institutions … dishonest lenders … and greedy borrowers and speculators with our tax dollars.

And as responsible savers and investors, we continue to suffer from the fallout as the Federal Reserve’s policies are keeping interest rates on traditional savings vehicles near zero.


Yet now our legislators are going to add one more little piece of insult to all this injury in their sweeping financial overhaul package by retroactively compensating thousands of depositors who lost money beyond the amounts covered by FDIC insurance.

A Quick Recap of FDIC Insurance …

Most individual bank accounts — including checking, savings, trust, certificates of deposit (CDs), etc. — are covered by the Federal Deposit Insurance Corporation up to certain limits.

Until the financial crisis hit in 2008, that limit was $100,000 for each individual account owner per financial institution. Yes, a single owner could get higher amounts covered depending on the specific types of accounts owned — but in most cases, this simple rule is the easiest and simplest way to guarantee coverage.

So if a husband and wife had a joint savings account, for example, they were typically protected up to $200,000. If a sole account owner had the same $200,000 … he would have been wise to open two $100,000 accounts at two separate banks to get full coverage.

I am probably not telling you anything you don’t already know. After all, these fairly simple rules of FDIC coverage were advertised and drilled into our collective heads about as frequently as the idea that smoking cigarettes causes cancer.

Simply put, back in 2008, nearly everyone in America — especially anyone with assets in the six figures! — should have known darn well how much of their money was covered by FDIC insurance, and how to easily get full coverage if they had more than $100,000.

But apparently, thousands of people using Indymac Bank — the California behemoth that went under in July 2008 — did NOT understand these things.

Thousands of depositors at failed Indymac Bank are now getting a private bailout.
Thousands of depositors at failed Indymac Bank are now getting a private bailout.

I say that because under the financial regulation overhaul now working its way through Washington, a little-known provision will retroactively insure about 8,700 depositors at Indymac Bank and five other institutions that went belly up before lawmakers increased FDIC coverage to $250,000 per account owner. All told, the cost of this bailout will be anywhere from $180 million to $200 million.

In a small Los Angeles Times article, one depositor who will get reimbursed put the bailout this way:

“It’s nothing to the U.S. government but it will help keep my wife and I slightly above poverty level for a couple more years.”

Okay, wait a minute. You had deposits in excess of $100,000 and this bailout will keep you above the “poverty level?” And at the same time, a couple hundred million is a drop in the bucket for everybody else?

This is the logic that bailouts are founded upon.

Meanwhile, in the same story, another depositor blamed everyone from a misinformed teller to bank regulators for the fact that she put $360,000 in a single account.

Never once did she acknowledge that two minutes of research on her own part would have made it completely clear that all her money wouldn’t be protected in one account.

Call me crazy, but if I was about to deposit that amount of money, I might spend a little time performing a simple web search or calling the FDIC myself.

I Wonder Why We Even Pretend to Have Rules At All …

Let’s put this in another context: Say you decide to drive your car around without collision insurance. You should know darn well that if you get into an accident you’re going to pay out of pocket, right? And you probably understand how to get collision insurance added to your policy, too. If not, you probably shouldn’t be driving in the first place!

Now, let’s say you get into an accident. Should you be allowed to call up the insurance company and add collision insurance after the fact to cover your accident?

Of course not! Heck, even if the insurance company decides to provide collision insurance to all its customers a month later, why on earth would you expect your accident to be covered?

It’s the same thing with this FDIC situation.

To be fair, some of the affected depositors are claiming paperwork wasn’t filed correctly … that joint owners weren’t added … and that other clerical errors caused some of them to miss out on coverage that they thought they had.

I don’t want to seem unsympathetic. Some of that could be true, and I really do feel bad for their losses. However, it’s still on each depositor to check that things have been done properly, isn’t it? And what about all the other people who get bailed out undeservedly?

I should also note that even before this measure, the FDIC had already reimbursed depositors $0.50 for every $1 in deposits they had above the original $100,000 coverage, too.

So in the end, emotions aside, this seems like yet another example of “he who behaves most irresponsibly and whines the loudest, wins.”

I’m left wondering why we even pretend to have rules at all, when they’re so easily bent and exceptions are so easily made.

More to the point, I’m left wondering when the rest of us — hard-working savers, yield-starved retirees, responsible borrowers, and people who perform their due diligence — will get a fair shake!

Really, the only silver lining of this financial overhaul is that the raised $250,000 FDIC coverage will probably get made permanent. But with interest rates remaining so pathetically low, that’s an awfully thin thread to celebrate.

As far as I’m concerned, you’re still far better off looking at higher-yielding alternatives that provide solid income, relative safety, and are far less subject to the rather arbitrary and unfair decisions coming out of Washington these days.

And obviously, if you do have more than $250,000 under a single social security number at a single bank … please reconsider your strategy immediately. Many banks are still going belly up, and there is absolutely no reason any of your money has to be at risk.

Best wishes,

Nilus

Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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