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Who said only Large Banks’ security was in jeopardy?

no brain scarecrow wizard of oz

Let this be a Warning to you: Last week one of our writers checked one of their banks’ safety some six or so months ago. It had a Good rating but it has now fallen to a D-; indeed, things can change quickly.  Were it not for the FDIC already being in the RED “There are no green shoots at the FDIC, only red ink. And it’s going to get worse before it gets better.”  says the NYT, it is certain many more banks would be shuttered had the FDIC still had funds to do so.

You can use this tool provided by The Street to check out the safety of your bank. To use the TOOL you simply type in the name of your bank and the state it is located in. Do yourself a favor and check your own bank’s safety!

Regarding the FDIC guarantee being in the RED and expected to stay that way until 2012 there are some facts much of the public does not realize about the FDIC  that you should know you can read about them HERE some snippets…

By the end of 2010, more than 200 banks will have failed. Most depositors will have little clue their bank was even at risk. Worse yet, the string-pullers in Washington are doing everything in their power to hide information about the safety of your bank from you. Learn what you can do now to protect your money. Read More

I thought the FDIC has full faith and credit backing by the US treasury?

Actually, no, it does not. The language in Section 14 of the FDIC Act is clear and unambiguous (emphasis mine): (a) BORROWING FROM TREASURY.– The Corporation is authorized to borrow from the Treasury, and the Secretary of the Treasury is authorized and directed to loan to the Corporation on such terms as may be fixed by the Corporation and the Secretary, such funds as in the judgment of the Board of Directors of the Corporation are from time to time required for insurance purposes, not exceeding in the aggregate $30,000,000,000 outstanding at any one time, subject to the approval of the Secretary of the Treasury: Provided, That the rate of interest to be charged in connection with any loan made pursuant to this subsection shall not be less than an amount determined by the Secretary of the Treasury, taking into consideration current market yields on outstanding marketable obligations of the United States of comparable maturities.

Now that’s pretty interesting. First, that any additional money from the federal government is not a guarantee, but rather a loan, which will only be made subject to the approval of the Secretary of the Treasury. Further, that the loan is to be made at “current market yields.” What do you suppose would happen to US Treasury yields during a true emergency? We can imagine a few scenarios where they might skyrocket, and this would serve to compound the difficulty of keeping the FDIC fund solvent.

How long does the FDIC have to repay me if things go bad?

Here things get murky. We turn to Section 11 of the act and find this (emphasis mine):(f) PAYMENT OF INSURED DEPOSITS.– (1) IN GENERAL.–In case of the liquidation of, or other closing or winding up of the affairs of, any insured depository institution, payment of the insured deposits in such institution shall be made by the Corporation as soon as possible, subject to the provisions of subsection (g), either by cash or by making available to each depositor a transferred deposit in a new insured depository institution in the same community or in another insured depository institution in an amount equal to the insured deposit of such depositor.

That only says “as soon as possible” and sets absolutely no time limit or maximum. Taken to the extreme, it might be impossible for the FDIC to ever make depositors whole again, and this is one of dozens of such “outs” that exist in the document. Remember, this act was written in 1933 when money was gold, times were uncertain, and government lawyers were exceedingly careful to avoid locking the government into any possible financial black holes.

And the FDIC Act is very clear to spell out that the only insurance funds available to depositors are those that exist within the fund itself:(f)(1)(A) all payments made pursuant to this section on account of a closed Bank Insurance Fund member shall be made only from the Bank Insurance Fund

So, if the fund runs dry, there isn’t another possible source of funds that can be legally tapped without changing this wording. And that would take – wait for it – an act of Congress.

Surely Congress would appropriate the necessary funds to keep the FDIC solvent?

Here your guess is as good as mine. We would personally expect the US Congress to do everything in its power to the keep the FDIC well funded, especially during an emergency. We would not fault their desire here. But we can also think of a few scenarios or circumstances under which their ability could be taken away. For example:
  1. If the banking crisis came at the same time as an interest rate spike and general funding emergency
  2. If we were at war with Iran and things were not going well
  3. If China suddenly started dumping their Treasury holdings in the opening gambit of an economic war

These would all be times under which we could easily imagine either a lethargic or inadequate response from Congress on the matter.

Don’t be a No Brains Scare Crow check the Safety of your Bank today and if it has a poor rating Move Your Money but make sure to check out the Safety of the Bank you are moving it to first (Avoid those big banks when they go down it may be the Straw that completely breaks the Camels back and yours too trying to get back your money) so check out the smaller banks just be sure they have a Good or better rating!

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