Is Your Money Safe in the Bank?

The Federal Deposit Insurance Corporation (FDIC) states there are currently 117 "troubled banks" on its watch list.  The FDIC is supposedly prepared to insure the deposits (up to the FDIC limit) for those banks, should they fail.  But, Washington Mutual and Wachovia -- two of the largest bank failures in history -- weren't even on the FDIC's list before they collapsed.

That begs the question, how accurately is the FDIC tracking potential bank failures.  And, more importantly to each of us:  how safe is your money if the FDIC is terribly wrong?

A report on CNBC today enumerated the bank failure estimates of some notable banking research firms, most of which have been in business for many decades and are well regarded as experts within the banking industry.  Those firms found:

• RBC Capital: 300 likely bank failures over the next 3 years.  Nearly three times more than the FDIC currently expects.
• Bauer Financial:  426 potential bank failures, or banks needing assistance to avoid failure.
• Weiss Research:  1,479 banks plus 159 thrifts, with total assets exceeding $3.2T.

The Weiss report, which is by far the most troubling, estimates over 1,500 potential failures.  That is 1-in-9 of every bank in the US.  It also represents 41 times the assets the FDIC currently has available to insure deposits, which again is based on their, much smaller, 117-banks number.

So the big question is:  can the FDIC come up with $3,200,000,000,000 to cover insured bank deposits should the worst case scenario play out?

The FDIC is "backed by the full faith and credit of the United States of America".  I actually take some comfort in that.  Not as much as I used to, but I highly doubt the US will go out of business anytime soon.  However, anything is possible given current events.  Another, related question arises if one was to worry that the FDIC might not make good dollar-for-dollar on full coverage of insured deposits:  what about US Treasuries?  Hopefully everyone agrees that if US Treasuries were to "break the buck", we're all (as in everyone, worldwide) in for one terrifying ride.

More likely, the FDIC will cover everything.  But at what cost?  How many trillions can we print?  Already, the printing press is losing its leverage, and deflation is taking hold regardless of helicopter-Ben's generosity.  Even if the FDIC returns all those trillions to the depositors, that doesn't mean depositors will spend them.  Rather, if such a terrible failure of the banks were to occur, I posit that you and I would take our FDIC-insured dollars with the ink still wet and stick them under our mattresses.  I know I'm keeping much more cash in reserve than ever before in my life right now.

That is _exactly_ what happened in the Depression.  Liquidity couldn't be printed, bought, or borrowed.  The only escape is fundamental growth.

Comments

[Brand]

So will there come a point at which the U.S. Treasury yield starts to climb to heights around 8%+?

[astrid]

I just can't imagine a world where the FDIC is allowed to fail. Having said that, I'm making sure to have some cash on hand (a few hundred dollars) and I have accounts open in several banks, just in case.

[randolfe]

We have enough in the safe to get by for a while if the ATMs were to stop working for a few days. Having said that, I highly doubt that will happen and don't advocate it. But if it helps you sleep better at night, as it does with me -- having heard far too many stories of the Depression from my grandparents growing up -- then it's worth it.

I've also been very careful to keep our money spread out. Currently it's spread across BofA, Etrade, Vanguard and Interactive Brokers. We have enough in any of those to get by for long enough to figure out what to do next, and none exceeds the FDIC except for the banked-home-equity-in-waiting, which I have now entirely in a Vanguard Treasury fund, happily earning about 0% return, but guaranteed to return itself to me when I call upon it.

[Brand]

As the market falls, I've been feathering into an S&P index fund in my 401(k). But aside from a few stocks that I've held forever, most everything else is in cash or insured CDs.

[randolfe]

My wife has been averaging into her 401k too. My SEP has been 80% cash and 15% bonds for a while now, but I'm preparing to start averaging it back into a S&P index.

My post-tax investments have been accumulating big-cap techs and the q's starting a couple days ago.

My hot-money in I.B. is running on 3 models right now: (1) a Fed yield spread model; (2) a couple of unilateral pair spreads, like SPY-QQQQ and QQQQ-NVDA; (3) a QQQQ-crash-panic model, which is basically a quantitative measure of overshoots which buys dips and sells rallies. All those together are running about 4%, which isn't great but better than zero right now.

[Brand]

Randy, I got a form letter from my senator today. I've forwarded it on. He voted against the bailout for all the right reasons, and it's possible that he'll get hammered in the next election because of that. In my book, he goes down as a true American patriot. There are times when I'm genuinely proud of State of Colorado. :)

[Brand]

Er, apologies. He's not running in the next election. Made a promise to only serve two terms. Darn shame, that.

[astrid]

@ Brand: Pre-voting on the bailout, the for-against ratio of mail/email to congress was about 1-100. Now, maybe that sentiment has changed since because the American people are now realizing the severity of the problem, but DO NOT tell me anti-bailout was the HARD stand to make.

[randolfe_]

It was not a hard stand to make in terms of constituency. It was exceptionally hard to make in terms of partisan politics. Especially for the Democrats who broke party and voted against it. But even the Republicans were under tremendous pressure to support the deal.

Politics of that sort has a long memory, and many of those who voted against it will find themselves paying a penance to their party leaders later.

[Brand]

astrid, can you imagine the commercials in the next campaign? "In 2008, America desperately needed a financial rescue. Wayne Allard voted no. A vote for Wayne Allard is a vote against helping America. ... I am (Democrat) and I approved this ad."

[ntets]

seriously, neither was on the watch list? man i was surprised they lasted as long as they did... "troubled mortgage section" indeed.

anyway as long as other banks are willing to buy either *just the deposits or all of the whole bank, then fdic wont hand out dime 1... since banks despirately need capital, they seem mighty tempted with deposit operations

[astrid]

More than half the Congressional Republicans voted against the bailout, so I doubt there will be serious repercussions from their party leadership - there are just too too many of them.

The Congressional Democrats were ambivalent about the bailout for other reasons and their leadership expressly allowed some of their candidates against Republican incumbents to campaign against the bailout. Besides, Congressional Democrats are notoriously undisciplined nowadays.

As for electoral danger - you have to balance that with the far far greater danger of bailout voting during this election cycle. You both are missing the actual locus of the danger, which are party primaries and not the general election - and GOP lawmakers who voted for the bailout will always be in danger in such contests due to nature of that particular constituency.

Finally, if the GOP are decimated because of their vote on the bailout, it's what they deserve for putting market fundamentalism above the immediate needs of their electorate. I would also call it well deserved karmic payback - for all the years of denouncing Democrats as unpatriotic and soft on terrorism, for making the 2nd Amendment the only part of the Constitution that matters, for cutting taxes for the wealthiest while racking up record debts for their imperialist adventures abroad, for stocking the civil service with unqualified ideologues, for stroking fear and hatred at every opportunity until that's all they have left. That goes for their ever declining base of support as well, Brand. If you can't tell what's wrong with the past 8 years of Republican rule (yes, including the past two years, when they continue to use every trick in the book to get what they want and prevent Democrats from implementing anything constructive) - well, lucky for you that you're about to get a far far better government than what you deserve.

[randolfe]

ntets,

Those bank mergers are largely being set up as "arranged marriages" by the FDIC. Who do you think is paying for the reception?

In fact, the FDIC is backstopping the assets of the failing banks being acquired. In other words, every time a failed bank gets bought, the FDIC pays another few hundreds of millions or more.

[randolfe]

astrid,

I was talking about primary challenge risk. Reps who went against their party's explicit, pressured leadership on the bailout are at risk of being isolated during their next primary in 2.5 years. Both parties allowed certain, key folks to vote against for political practical reasons.

You probably also know that neither I, nor anyone who cares to read my blog are free market fundamentalists. We are true capitalists, and true capitalists recognize that capitalism requires an efficient, effective regulatory framework upon which to operate an efficient free market.

I agree with a lot of what you say, though I'm not sure there is any partisanship here from me or Brand. While I'm usually in the position of denouncing both parties for their incompetence and corruption, I am not one of those who insists on drawing equivalency. The Republicans have presided over the greatest crisis of competence in my lifetime. They have resorted to the lowest form of political electioneering in order to engineer electoral wins. The result has been G. W. Bush, who is easily the worst President of modern times.

And I wrote previously about Palin. It is disgusting. What I think about her sharply, inappropriate partisanship isn't even required for me to roundly criticize her. Simply, she is unqualified. The sort of politics we've descended into in this country produces the likes of Palin. I'm not sure you can pin the blame of that on "the other side". It's more a reflection of the entire societal system we've evolved into.

[Brand]

I'm not in favor of either party, really. I've always leaned Republican, but I think all bets are off these days. btw astrid, you can hammer away at the Republicans for hands-free driving, but the Democrats certainly contributed with "enhancements" to the FHA, Fannie and Freddie, plus the repeal of Glass-Steagall.

[randolfe]

I picked the Teddy bill for a reason. I'm not sure which Roosevelt moment we're fast approaching, but I am fairly certain it's one of the two. Right now it's feeling more like a FDR moment. But we're not there yet. And, if possible, I don't want to get there.

I still hold out hope that we can avert a full-on Great Depression scenario, at least for a long while, and with real Teddy-style leadership we could go on to surprise the world for another century or so. I don't think that is Obama. What Obama has going for him is that spark of real leadership quality. He could fill the shoes of a Kennedy, maybe a FDR. But he's no Teddy, nor does he pretend or aspire to be.

[Brand]

At the risk of starting a political debate... do you really think that McCain is a modern parallel for Teddy Roosevelt? Although I guess his veep rides horses, owns rifles and stews up moose. ;o

[randolfe]

Since I've already stepped into the election politics, I'll go ahead and reveal my biases. I generally shy away from anything political because it immediately alienates partisans, who then tend to shout out any other conversation. That's why on Patrick, Zillow, SeekingAlpha, etc. I tend to just ignore anything political.

My ideology is almost entirely Objectivist. There aren't a lot of us around anymore, or at least it feels that way most of the time. Objectivists are *not* Libertarians, who for the most part are really just narcissists masquerading as Republicans when convenient.

I'm also a Progressive, in the classical sense of the term. Somewhere along the line that became a synonym for Liberal, but traditional Progressives were the the antithesis of Regressives, not of Conservatives. Progressives were those who did things like forge "liberal" systems of government -- like Democracy. They established "liberal" market systems -- like Capitalism. They heralded in liberalization of the economy -- like the Industrial Revolution.

I do not wish see regression. Unfortunately, many contemporary Conservatives and Liberals alike are really just regressive, often Luddite. I have little use for any of them. Similarly, I see neo-theocratic sorts as regressive, and have little sympathy or tolerance for their ideologies or goals. They are not interested in freedom, only in the power to control others. As an Objectivist, I believe that sort of ideology runs counter to the very essence of mankind.

People like me tend to not be very popular in the current partisan environment. Whenever I get into political discussions, inevitably, one "side" will start thinking that I'm "with them", only to find out shortly thereafter that I'm criticizing their "side" just as roundly. Next, they'll decry that people "like me" just damn everyone without offering any solutions or ideas. They marginalize the "complainers in the middle" as being worthless cowards unwilling to commit to either "side".

Usually that sort of debate ends either by me withdrawing, if it's happening in pleasant company. Or, with me pointing out the problem is the partisans who insist on choosing sides are feeble of mind, weak of critical thought, and either unable or unwilling to step outside their own myopic biases for even a moment -- so as to consider there might exist a deeper perspective on the things they think they've figured out so well.

[randolfe]

Brand,

No. I do *not* think McCain is any Teddy Roosevelt. He _perhaps_ had that potential some years ago, when he really was a bit of a "maverick" within his party. But today, he is little more than a last-ditch effort by a generation past it's prime to exert some fleeting influence. And look at the cost to him: Palin. He's had to mortgage his "soul" just for the chance to be a weak president for however many years he manages to keep his heart beating.

McCain will be weak. Palin will be a disaster of epic proportions. She won't govern for long because, assuming she doesn't invite her witch hunting minister in to push the button, she'll get isolated and/or impeached in short order.

[Brand]

Palin is really what's pushing me towards Obama. She scares the crap out of me--in many ways a W. junior but with (apparently) even less restraint. But I've said this before, I am deeply worried about the damage that a Democratic congress with a Democrat president could do.

I would describe myself as a Constitutionalist. I try to avoid labels, though--it's better to define yourself in terms of what you stand for. I am very much in favor of free trade and free markets, but with a short list of critical protections that are ferociously enforced. I am a Christian who holds life in the highest regard, which also entails peaceful policies towards the rest of the world. (Neo-cons just make me nervous.) And most of all, I believe that handouts and entitlements are a drag on the true American spirit of entrepeneurship and personal industry. The government should subsidize education, not a comfy retirement or unnecessary welfare. And it is a true outrage that we are borrowing from future generations to fund our consumption.

Ron Paul was my presidential candidate of choice, except that he sometimes drifted into Tin Foil Hat Land. I was not a fan of a secondary hard currency policy, nor of some other ideas. But he was against pork, against war, against entitlements, against chipping away at the Constitution, pro-trade, pro-life, pro-regulation and generally a sensible fellow.

[randolfe]

Ron Paul lost me because he seemed to have no sense of perspective about when he crossed into goofball land and when he was being rational. He really lost me on the central bank issue, where he was directly asked about it in simple terms and he refused to answer because he either didn't see, or didn't want to acknowledge that he could never eliminate the central bank anymore than he could ever eliminate nuclear weapons.

The problem I have with partisan politics of today is they lead us to think there must always be "2 sides" to everything. Sometimes, there isn't a debate. Sometimes, there is a terribly messy, complicated, ungovernable gray-area, not just right & wrong.

Most of what you stated are not binary positions. One can be against the war, and against war in general, but still support a strong military.

Once can be against entitlements in general but recognize that certain entitlements are appropriate and well earned. For example, entitlements for retired war veterans, for injured fire fighters, for school teachers who have forgone a life of much higher pay (which itself invokes another problem, that would eliminate the need for any entitlements for teachers at all if solved).

One can be a Constitutional Constructionist without being regressive. The Constitution purposefully allowed for progression and amendment.

One can be pro-trade while demanding a level playing field, being fully prepared to sanction countries which refuse to play fair by using forced prison labor, child workers, terrible environmental policies, etc.

One can be hold life sacred while defending abortion rights. Even here there is no black & white. And it's hypocritical for Constitutional Constructionists to worry so about slippery-slope government intrusions everywhere else but for some reason be copacetic about the government being allowed to usurp the medical decision of a doctor. In fact, there are cases where abortions is undertaken precisely because it is the most respectful of protecting the sanctity of life. Talk to any parent who has faced a prenatal triploidy of an unborn child they dearly wished to have.

But all that takes reasoned discussion. It doesn't fit well in our current environment of bumpersticker soundbite gotcha.

[Brand]

So is your problem with the politicians or with the voters? The only reason anybody plays "bumpersticker soundbite gotcha" is because that's how Joe SixPack makes decisions. If it's longer than the average beer commercial or requires significant investigation or reasoning, you can pretty much forget it. That's exactly why the Framers put the big decisions in the hands of the Electoral College.

[randolfe]

If I say my problem is with the voters then I'm an elitist. Of course, it is with both. The voters for allowing it to happen. The politicians for knowingly exploiting the ignorant.

[randolfe]

The Framers were pretty much all elitists, now that I think of it. Perhaps we have too much Democracy for our own good given modern communication and demographic, statistical electioneering techniques?

[Brand]

Now we're getting into a "Peter P"-esque discussion. I actually believe that our sudden ability to deliver massive amounts of visual stimulation is rapidly outstripping our biological limitations. Evolution is powerful, but it's only so fast. The human addiction to television and emotional intensity is really the higher-order equivalent of moths swarming a floodlight. At one point that sensitivity served a useful purpose, but now it's being exploited (largely unknowingly) via technology.

[randolfe]

I actually agree with that quite a bit, though I'm very pro innovation and technological advancement. I was just talking to some friends earlier about how each major communications revolution invalidated previously stable forms of government. It could well be that we're moving into a post-democratic/representative era. Perhaps a technocracy is what's next.

[Brand]

LOL. That just makes me want to go watch Terminator: Salvation. Screw McCain; vote SkyNet!

I do think that more and more people will unplug as they simply overload from the torrent of information. People recognize that there is a lot of misinformation on the web, and yet it's so tough to filter. It's like T.S. Eliot said, "Where is the knowledge we've lost in information?" And I do think that individual humanity is often lost through the proxy of technology.

Technocracy... it's almost just a theocracy with a different veneer of legitimacy, isn't it?

[randolfe]

I don't know about technocracy being akin to theocracy, but it is definitely related to fascism. I'm also not advocating that technocracy is something to be desired. I see such a system as snuffing out entrepreneurialism and free capitalism.

Without diverting this into a seriously philosophical discussion which has even less relevance to what's going on in the real world, I'll say why I think I legitimately worry about an emerging technocracy. I see technocracy as the result of establishing a sustainable, durable socialism. Socialisms are not sustainable. They pretty much all exist as parasites on real-growth economies, which tend to be capitalisms (or historically short-lived fascisms). Socialism requires equilibrium conditions to survive. Technocracy engineers that equilibrium, and gives the people everything they "need", so they don't mind or notice their accumulated loss of freedom.

[Brand]

Well okay, that's a bit 1987 for me. :)

However, I've been ranting about bread and circuses for a while, which is a parallel idea. Entertain the people, service their basic needs, and you can have whatever you want. In my (real life) example it is an enticement to debt and short term gratification; in your technocracy it is taken to the extreme via technology.

Which brings us back to certain points about the real world U.S. economy. The aging boomers expect a considerable menu of entitlements like Social Security and Medicare. Why wouldn't anyone like to reap a comfortable lifestyle, die and stick a faceless future generation with the bill? I think we'll eventually have another crisis like the present financial meltdown when they try to draw out those entitlements, and possibly even lobby to increase them. At times our republic begins to look like a true democracy--three wolves and a sheep discussing what to have for dinner.

[Brand]

Doh, I meant 1984. Orwell & Big Brother, not the last financial crash. (chuckles)

[randolfe]

Back to the issue at hand, did anyone else notice that today's Treasury auctions failed to perform as I think the Fed wanted. The long end of the curve is refusing to behave.

There's a real problem brewing. It smells like a liquidity trap. For all the "conventional wisdom" which says if you lower rates then American banks will lend, then American companies will issue credit, then American consumers will spend -- perhaps that wisdom is breaking down. It is starting to look like the credit-driven consumerism is simply shutting down. People are tapped out, salaries aren't rising, and the consumer's last reservoir of debt, their house, has run dry.

Deflation is afoot.

[Brand]

Randy, did you read the WSJ article today about European authority to generate dollars from the Fed? Apparently a lot of EU banks want to replenish their reserves, and the Fed has authorized some kind of exchange or proxy money creation via the ECB? The article was extremely vague on details, but it immediately raised my eyebrows in surprise.

[randolfe]

I read about it in the FT. It may be the FT's bias, but it is sounding more and more like Europe is in big big trouble. I really hope that not too many of the Patrick.net people followed the advice of the Schiff crowd. Turns out that Europe is not only dependent upon dollars, they are addicted to them.

My international finance & currencies professor in B-School was a guy who used to work for the IMF and helped to set up recovery currency regimes in various African countries after they had suffered from hyperinflation and economic collapse. I remember his views on the EUR were basically that it was a "parasite currency". It only existed as a free-rider on the USD. Otherwise it lacked the fundamental basis which describes other globally convertible currencies like the GBP, CHF, etc.

[randolfe]

His view was basically this:

The US dollar is an absolutely dreadful currency, afflicted by about every problem you can imagine. It's just better than all the other choices.

[Brand]

If nothing else, the dollar is the currency of oil. However, if the ECB is creating dollars out of thin air, doesn't that imply stagflation more than deflation?

[randolfe]

The complexities behind the eurodollar complex are such that I don't pretend to understand them entirely. I read the ECB's dollar-printing proxy rights as more a way to back fill USD capital demand for European trade. The USD is the reserve currency for more than oil, and Eurozone states are finding shortfalls of dollars demanded by trade.

I think it's more of a sign that they're trying to control the fall of the euro so that it doesn't overshoot parity with the dollar. Just my suspicion, not based on any model I've seen yet.

As for stagflation: I believe stagflation started in Q1 or Q2 of 2007. We just haven't declared it yet. The meteoric rise of energy and food prices coupled with falling corporate earnings and shrinking jobs & incomes, all during a period where interest rates were falling. All that equals stagflation.

I think the stagflationary period is drawing to a close and giving way to broader deflation now. It's not 100% yet, but growing all the time. The emerging evidence of a liquidity trap forming may be the final straw. After that, consumer spending will fall off a cliff, and thereafter deflation begins in earnest.

[astrid]

Apologies in that case. I'm certainly not a fan of the Democratic party and I still have some reservations about Obama (I'm not sure if he'll turn out to be FDR or Jimmy Carter - though Carter is looking increasingly prophetic nowadays).

To clarify, I didn't intend to accuse either of you as market fundamentalists, but many movement conservative Republicans are market fundamentalists. They're only interested in further tax cuts and deregulation, regardless of the circumstances and consequences. Some of their counter proposals to the bailout, such as cutting capital gains tax, are the fiscal equivalent of bleeding a patient struck with the plague.

I don't think there will be any punishment for opposition to the bailout, especially on the Republican side. There are simply too many Republicans who voted against it. The GOP party leadership can't punish them all. Furthermore, as indicated by McCain's on again, off again, on again, off again rhetoric regarding the bailout - the Republican leadership are extremely ambivalent about the bailout. When it failed during the first go around, they blamed Pelosi's rhetoric for their failure to deliver votes. I think that shows their level of commitment to the bailout.

As for Palin. All I will say is that she is tailor made for the likes of Bap33. So long as she looks good and spins hateful lies about the other, she will have a constituency. I'm very glad to hear that just about everyone else has bailed, however.

[astrid]

In retrospect, 2007-September of 2008 was pretty much textbook stagflation. Arguably, the entire 2002-2008 period was stagflation. Wages didn't go up much for most people, but they were able to use credit and home equity to pay for higher costs for healthcare, education, and home ownership.