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What if the FDIC fails?

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Christopher S Penn
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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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Comments

34 responses to “What if the FDIC fails?”

  1. Chris Van Patten Avatar
    Chris Van Patten

    Where would you suggest people keep there money out of curiosity? Foreign accounts? Keep it in cash? I'm starting to get worried about all these financial problems but I want to act rationally and safely.

    Reply
  2. Albert Willis Avatar
    Albert Willis

    This is beginning to get really ugly. Here's the coverage from a financial blog I read: http://feeds.feedburner.com/~r/MishsGlobalEcono….

    Reply
  3. Christopher S. Penn Avatar
    Christopher S. Penn

    Short term, I'd look to diversity. Cash in a few places, keep a close eye on events, but make sure whatever you store your money in, it's liquid and can be moved fast.

    Longer term, I always defer to people who are smarter than me. Look at someone like Warren Buffett and where he's placing his bets – his track record is damn impressive, and I'd be a fool to try and outguess him.

    Reply
  4. TechnoMom Avatar
    TechnoMom

    IndyMac isn’t going to be the first of the major financial institutions to fail.
    I think you meant last, rather than first.

    I didn't realize we were at that point. Thank you.

    Reply
  5. Christopher S. Penn Avatar
    Christopher S. Penn

    Fixed up, thanks!

    Reply
  6. Chris Van Patten Avatar
    Chris Van Patten

    Where would you suggest people keep there money out of curiosity? Foreign accounts? Keep it in cash? I’m starting to get worried about all these financial problems but I want to act rationally and safely.

    Reply
  7. Christopher S. Penn Avatar
    Christopher S. Penn

    Short term, I’d look to diversity. Cash in a few places, keep a close eye on events, but make sure whatever you store your money in, it’s liquid and can be moved fast.

    Longer term, I always defer to people who are smarter than me. Look at someone like Warren Buffett and where he’s placing his bets – his track record is damn impressive, and I’d be a fool to try and outguess him.

    Reply
  8. TechnoMom Avatar
    TechnoMom

    IndyMac isn’t going to be the first of the major financial institutions to fail.
    I think you meant last, rather than first.

    I didn’t realize we were at that point. Thank you.

    Reply
  9. Christopher S. Penn Avatar
    Christopher S. Penn

    Fixed up, thanks!

    Reply
  10. Albert Willis Avatar
    Albert Willis

    This is beginning to get really ugly. Here's the coverage from a financial blog I read: http://feeds.feedburner.com/~r/MishsGlobalEcono….

    Reply
  11. Scott Avatar
    Scott

    “If the FDIC’s insurance fund drops below $10 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.”

    So, you're basically advising a bank run if FDIC looks like it's on shaky ground which will surely lead to much greater financial crisis.

    Reply
  12. Christopher S. Penn Avatar
    Christopher S. Penn

    Plan ahead, but prepare for that eventuality. If the FDIC fails, a bank run is likely, so better to be early in line than late,

    Reply
  13. Christopher S. Penn Avatar
    Christopher S. Penn

    Plan ahead, but prepare for that eventuality. If the FDIC fails, a bank run is likely, so better to be early in line than late,

    Reply
  14. Hittman Avatar
    Hittman

    The government will not allow the FDIC to fail. They routinely appropriate billions of dollars for all kinds of things, and would not allow a situation that would cause a run on the banks.

    Reply
  15. Hittman Avatar
    Hittman

    The government will not allow the FDIC to fail. They routinely appropriate billions of dollars for all kinds of things, and would not allow a situation that would cause a run on the banks.

    Reply
  16. harnold Avatar
    harnold

    The FDIC is weak because the President's Administration is weak. Anything can happen…..And guess what, the banking oversight administration is weak. No U.S. Senator should be blamed for a run on the banks…….It's the administration and guess what….more of the same with McCain.

    Reply
  17. harnold Avatar
    harnold

    The FDIC is weak because the President's Administration is weak. Anything can happen…..And guess what, the banking oversight administration is weak. No U.S. Senator should be blamed for a run on the banks…….It's the administration and guess what….more of the same with McCain.

    Reply
  18. Scott Kiekbusch Avatar
    Scott Kiekbusch

    “If the FDIC’s insurance fund drops below $10 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.”

    So, you’re basically advising a bank run if FDIC looks like it’s on shaky ground which will surely lead to much greater financial crisis.

    Reply
  19. Christopher S. Penn Avatar
    Christopher S. Penn

    Plan ahead, but prepare for that eventuality. If the FDIC fails, a bank run is likely, so better to be early in line than late,

    Reply
  20. Hittman Avatar
    Hittman

    The government will not allow the FDIC to fail. They routinely appropriate billions of dollars for all kinds of things, and would not allow a situation that would cause a run on the banks.

    Reply
  21. Sean J Connolly Avatar
    Sean J Connolly

    My God it seems that the whole world is falling apart, the bit I dont get is that people dont think banks and insurance places need money, taking monney out will not help. Just look at Northern Rock in the UK. people are selfish.

    Reply
  22. Sean J Connolly Avatar
    Sean J Connolly

    My God it seems that the whole world is falling apart, the bit I dont get is that people dont think banks and insurance places need money, taking monney out will not help. Just look at Northern Rock in the UK. people are selfish.

    Reply
  23. harnold Avatar
    harnold

    The FDIC is weak because the President’s Administration is weak. Anything can happen…..And guess what, the banking oversight administration is weak. No U.S. Senator should be blamed for a run on the banks…….It’s the administration and guess what….more of the same with McCain.

    Reply
  24. Sean J Connolly Avatar
    Sean J Connolly

    My God it seems that the whole world is falling apart, the bit I dont get is that people dont think banks and insurance places need money, taking monney out will not help. Just look at Northern Rock in the UK. people are selfish.

    Reply
  25. Jonathan Fleming Avatar
    Jonathan Fleming

    I really wouldn’t worry about it, it is a short term pain for sure, however panic, worry and undue stress won’t help! There is nothing anyone can do, every ten years crazy things happen after a major bull run. History is layered with this stuff, in the short term there is pain, however in a few years, things always get better. I would not believe all the doom and gloom hype, it sells newspapers! 🙂

    Jonathan Fleming
    http://www.localhouseblog.com

    Reply
  26. Alain Wong Avatar
    Alain Wong

    This is definitely a scary thought. But I think the government will not allow the FDIC to fail and merely print more dollars on an as needed basis. This of course will drive the dollar even lower. Gas at $8/gallon anyone?

    Reply
  27. Alain Wong Avatar
    Alain Wong

    This is definitely a scary thought. But I think the government will not allow the FDIC to fail and merely print more dollars on an as needed basis. This of course will drive the dollar even lower. Gas at $8/gallon anyone?

    Reply
  28. Alain Wong Avatar
    Alain Wong

    This is definitely a scary thought. But I think the government will not allow the FDIC to fail and merely print more dollars on an as needed basis. This of course will drive the dollar even lower. Gas at $8/gallon anyone?

    Reply
  29. Michael F. Avatar
    Michael F.

    Don't be so altruistic. We're the victims when we put our money into a bank and they can't give it back to us because they've mismanaged OUR money. They make their money using our money and sometimes they lose our money. So I don't think it's a matter of selfishness as much as it is a disappointment in the banking system.

    Reply
  30. Michael F. Avatar
    Michael F.

    Don’t be so altruistic. We’re the victims when we put our money into a bank and they can’t give it back to us because they’ve mismanaged OUR money. They make their money using our money and sometimes they lose our money. So I don’t think it’s a matter of selfishness as much as it is a disappointment in the banking system.

    Reply
  31. Mike Avatar
    Mike

    Okay, here it is, about 3 months later and the Dow is cratering and the S & P just went below 1000. Bank of America, after ingesting Merrill Lynch and Countrywide, has cut its dividend and has reported profits are off 68%, sending it's share price down. What's your take on the FDIC now ? Should I buy a safe?

    Reply
  32. Mike Avatar
    Mike

    Okay, here it is, about 3 months later and the Dow is cratering and the S & P just went below 1000. Bank of America, after ingesting Merrill Lynch and Countrywide, has cut its dividend and has reported profits are off 68%, sending it's share price down. What's your take on the FDIC now ? Should I buy a safe?

    Reply
  33. Mike Avatar
    Mike

    Okay, here it is, about 3 months later and the Dow is cratering and the S & P just went below 1000. Bank of America, after ingesting Merrill Lynch and Countrywide, has cut its dividend and has reported profits are off 68%, sending it's share price down. What's your take on the FDIC now ? Should I buy a safe?

    Reply
  34. Daniel Goldman Avatar
    Daniel Goldman

    Just found this article. It’s even more relevant now. The FED et al. have borrowed from our future growth and stability, at very high interest rates. The next recession could make “The Great Recession” look like a joke.

    Reply

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