Both Presidential Candidates have come out today in support of raising deposit limits to $250,000. John McCain talked to the President early this morning urging the President to push for an increase to help shore up support from House Republicans and Democrats who voted down the Bailout Bill.
Today, Chris Dodd, the first member of Congress who should be removed from office, discussed an increase with FDIC's Chairwoman who concurred and released a statement calling for a temporary increase.
Now...Although an increase is needed, the question becomes: Is this mere political maneuvering from a do-nothing congress and lame-duck president or would the American public be better served by waiting to raise limits until after this current credit and financial failure crisis?
Just one week ago, FDIC Chairwoman, Sheila Bair, during questioning stated that FDIC planned to raise premiums in early October, "not shockingly, but significantly". The move by FDIC is made in direct response to increasing fears that more bank collapses, such as those of IndyMac, WAMU and Wachovia could put a significant strain on the system if future buyers could not be found.
When questioned as to the health of FDIC's Insurance Fund, Bair reported that FDIC felt as if the current available funds were sufficient enough to meet demands if failures were to occur. However, as of the end of June, FDIC reported that the Insurance Fund had a balance of only $45 Billion.
Forty-Five Billion Dollars is a significant amount of funds; however, the amount pales in comparison to the $700 Billion we are told by Congressional Leadership, the President, the Treasury Secretary and head of the Federal Reserve that we need bailout Wall Street financials.
So is it really smart to raise the current insurance limits to $250,000 at this time?
First, consider the current limits; individuals are protected up to $100,000 per financial institution or $250,000 for bank-held IRA's or other retirement plans. That would mean for married couples if they were to have assets held in each name, plus bank-held IRA's they could currently protect $200,000-$300,000 per institution (assets held under different names and/or different registrations are each protected to $100,000). Now by raising the FDIC limits, this same couple could now protect up too $500,000 - $750,000 per institution. Now, who will this increase benefit the most? How much of an impact will these increases have on the insurance fund if a mega national bank or several large regional banks would fail?
Second, the rationale used by both candidates for this increase is to extend protections upon small business owners. Although there are many small business owners who these increases might apply to. Most businesses rely upon accountants and financial advisers who should be taking steps to help them protect their monetary assets and operating funds. The small businesses who are most vulnerable typically operate under a system whereas funds are flowing out of the company accounts as quickly as they are received. Reserves are typically swept into short term securities or higher-interest money market accounts. As company size increases the more diversity within their monetary portfolio.
Third, FDIC does not provide short-term protection? FDIC is not designed to release funds on day one. FDIC is designed as an insurance program that is to protect account holders only after an institutions reserves and assets are depleted. Therefore, small business owners operating on tight budgets may not recuperate funds from FDIC for month following a collapse. This would mean that those small business would have have to rely upon funds held in other financial institutions in order to pay employees until they recuperate their insured funds. As such, a increase in insurance protection would come to late to prevent a crisis for these small businesses.
Fourth, the massive consolidation of financials could mean that just one large failure could bankrupt FDIC. Last week, JP Morgan stepped in to purchase WaMu's $309 billion of assets to become the largest Commercial bank in the United States. One factor in the current crisis is the largely uncontrolled consolidation of companies and destruction of locally owned and regional financials over the past 15 years. These companies have become so large, with so little competition that the collapse of just one company can have enormous effects on the entire financial system. This shrinking and lack of competition has created "mega-financials" such as IndyMac, Wamu, Wachovia, Merrill Lynch. As these financials and others have failed, their assets are being purchased by the newly formed "Super-Mega Financials" such as Bank of America, CitiGroup, and JP Morgan. Now...Imagine if one of these "Super-Mega Financials" failed or suffered a massive run on assets...How many accounts might be depleted, what would be the psychological effect on causing a collapse of other financial or runs on other financials?
$45 billion dollars is not much money, when you consider that one day of losses in the market amounted to more than $1.1 trillion dollars. At current insurance fund levels that money would protect around 450,000 non-retirement accounts, if limits were increased this number would drop to 180,000. Now consider the fact that wealthy Americans may have maxed out accounts, multiple registrations within a single bank and maxed out retirement assets within these institutions. Just 30,000-60,000 families would have the ability to deplete the insurance funds.
FDIC was designed to operate under two premises:
A) Banks would be required to hold 2%-5% of their assets in reserves to meet any short-term run. Even for our largest banks that have $600 Billion in deposits, that would only have $12-$30 billion in reserves.
B) The system was designed at time in which the banking industry was comprised of primarily small and local institutions. It wasn't until 1998 that Bank of America became the first truly Coast-to-Coast national bank.
FDIC was designed to provide insurance and primarily as a consumer confidence weapon not to protect against failure but rather prevent the spread of panic. The premise was that if one small, local or regional institution were to fail and suffer a run on assets, FDIC could take control; pay out account holders; and the successful payout would re-assure the public who had accounts with other financial institutions and prevent the run on assets from spreading to other banks. Today, we no longer have this high level of competition within the banking sector, if a run were to occur on a Citigroup, Bank of America or JP Morgan the system could easily fail, and this failure could actually spread the panic and cause a run on larger institutions. If a small, local bank fails it is relatively insignificant at a national level, but if a "Super-Mega" national bank suffers the same fate the panic would undoubtedly spill over to the smaller institutions.
Our government has already called for a massive expansion of FDIC to cover millions of Investment Company Money Market accounts, and although these accounts will now be covered, premiums have yet to flow in and the government has taken no steps to provide immediate funding to the insurance fund. If FDIC limits are increased the insurance fund will be at even greater risk and I would contend that an increase will cause little change in consumer confidence in our financial system.
An increase in FDIC limits is needed, but any increase should be slowly phased in to allow time for financials to recover and premium increases to build up FDIC's insurance fund. I personally do not believe that there will be a massive run on banks that could bankrupt FDIC; but, I don't believe that anything is out of the realm of possibility considering the complete failure of leadership in both the financial sector and within our government. If FDIC were to become insolvent, the government would be forced to pick up the slack, and considering their massive bailout of the financial industry, could our nation or the global economy really afford this risk.
J Brown
October 1st, 2008
Please be sure to vote on this article at Real Clear Politics
Be Sure To Visit Our Friday Coffee Break Section For Reader Offers











