Here’s a scary thought. According to the Wall Street Journal and CNN, the failure of IndyMac, the second largest federally insured financial institution ever to fail, will cost FDIC approximately 10% of its insurance fund.
FDIC is the backstop, the guarantee to depositors at banks that there will not be a repeat of the Great Depression, when bank runs wiped out banks and depositors alike.
Here’s the unthinkable. IndyMac isn’t going to be the last of the major financial institutions to fail. (Fannie and Freddie, anyone?) There are a LOT of them on shaky ground. Bear Stearns, IndyMac so far – Lehman isn’t looking so good lately, and Bank of America just assumed control of the festering carcass of Countrywide.
How many failures of depositor-funded institutions can the FDIC handle before it’s in serious trouble?
I advised on my work blog that as long as your money is FDIC insured, you don’t have anything to worry about.
I’m not so sure of that now.
Keep an eye on the amount of damage the FDIC takes per bank loss. Keep a tally.
Right now, the FDIC is out somewhere between 4 billion and8 billion due to IndyMac. This is out of its insurance fund of 53 billion.
If the FDIC’s insurance fund drops below10 billion, it would probably be a really good idea to start looking at someplace to store your money other than in a financial institution of the United States of America. One big bank or several medium banks could wipe that insurance fund out at the $10 billion mark, and then it’s time to get your cash out of the bank, because there’s no safety net and a single run means if you get to the bank later than its other customers, no money for you.
Today is not the day to hit the big red panic button. Not yet. But don’t lose sight of it, and have a plan B ready to go.
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