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$250K FDIC Insurance Limit Helps Only Top 1.6% of Americans

We seem to have created a new device in Washington; it is a magic socializer wand. This wand sweeps aside constitutional limitations, enables the spending of trillions of dollars of tax payer money with little to no oversight and tramples any calls for informed debate.

With a puff of smoke, it instills fear into the hearts of the American people (opens their wallets) and collapses months of reasoned consideration by intelligent people into sweeping overnight approvals.

Government uses Fear to Increase FDIC Insurance to $250K
Let’s take a small example of what just happened with the FDIC insurance for deposit accounts contained within the misshapen bailout plan (“rescue plan” for supporters). The wand is waved and we are told by the “experts” including the ever eminent Lawrence Lindsey, and subsequently parroted by every completely uninformed TV personality for the day, that one of the things that “must” happen to restore confidence in the banking system is to raise the amount of deposit insurance.

One very prominent stock advisor even said it should be unlimited or raised to at least a million dollars an account. This then would stop panicked depositors from rushing to withdraw their money from the banking system (a “run on the banks”) and work to help stop additional bank failures.

Upping the FDIC Insurance Limits Helps the Elite at the Cost of the Middle Class
So, the wand was waved and it became so. Overnight, the FDIC insurance went from $100,000 per account to $250,000 per account. Admittedly, less and less stunned by the power of this wand, I couldn’t help but think about the following:

  • How many people is this really going to help?
  • Who are the people this is really going to help?
  • How much is it going to cost, since there will be a commensurate increase in FDIC insurance premiums?

Banks Must Pay Higher Insurance Premiums to FDIC
Since the banks will have to pay more in insurance premiums, this will, in turn, reduce their already eroded profits. This means that banks will have to increase what they charge in interest rates or fees and/or reduce the amount they pay depositors to pay for the increased insurance cost.

Let’s take a quick look at the numbers from the FDIC Statistics on Depository Institutions Report, U.S. domestic deposits as of 6/30/2008:

As detailed above, 98.4% of the current deposit accounts were already $100,000 or less, the amount already covered by FDIC insurance. The rules drive some part of the numbers (i.e., since the limit is $100,000, people keep their accounts under that level) but if you had a joint account under the old rules, you would still have qualified for $200,000 in deposit insurance.

The average balance in the accounts under $100,000 is $5,706. Using averages can certainly skew the statistical analysis (the unavailable median would be nice to compare); however, the fact that the average is so far removed from the cap tells you that the majority of the depositors were already covered.

The fact that a few wealthy people have to understand the rules and work within them doesn’t seem to merit this sweeping change.

In summary, we have a plan to double the FDIC insurance coverage to take care of 1.6% of the people with accounts that have an average balance $401,161. All of the system’s depositors will face increased costs when doing business with the banks, in order to increase the insurance coverage for a relatively small number of people.

Sound familiar?
The wand has done a great job in keeping actions like this within its socialist tenants by scaring the American people who earn the money into handing over the keys to free market capitalism. Many more current examples of the truth behind the Halloween mask can be found at http://pallante.typepad.com/

We’d better start in on collecting and destroying these wands or the next puff of smoke you see might contain our constitution, our precious “free market capitalism” and your individual freedom.

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Comments (68)
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  1. GEORGE ANDREWS said:
    on October 16th at 02:58 pm

    Private accounts can be structured to to cover multiples of $250,000.00 within the account. Business’s get $250.000.00 maximum, regardless how the account is structured. In the past, the banks would be happy to handle a “business” account and and not have to pay a dimes worth of interest. Today business’s can put money in an interest paying money market account or buy CDs with excess cash. banks now pay for the privilege to lend my capital for a profit. I am not sure when this changed, but I feel it’s been within the last eight years.

  2. Ian said:
    on October 16th at 03:37 pm

    Shea –

    Apparently you didn’t read my comments. #1 – CRA is not responsible for bad lending practices. Period. I am a residential loan officer at a bank, and CRA has never caused us to make a bad loan. As I said above, if you simply lend in the areas you collect deposits in, you are in compliance. #2, you are partially correct that banks stopped assessing risk because they sold their loans. However, eventually they went all out and started keeping some of those loans on their books as well. I work as a residential loan officer for a bank that keeps every single loan we make, so we never stopped accurately assessing risk. I hate the bailout because it is foregoing (postponing?) punishment on those who have earned it, however, credit markets are so locked up at this point that government has to step in or healthy companies will begin to fail. Look at GE, they are a great company but were unable to tap credit markets and had to go to Buffett just to pay their bills. That is what I call systemic failure of our financial markets. That is why I believe that stupid and annoying bailout is necessary. As for FDIC insurance, the original point of the whole comment, my contention still stands that depositors have demonstrated their ability to assess risk in the failure of WaMu. They afraid the bank would fail, so they withdrew their uninsured deposits. They knew the insured deposits were safe, so left that money in. I experienced it in my retail branch helping people make sure their money at my bank was fully insured, and by taking hundreds of thousands of dollars from WaMu from people specifically citing FDIC insurance reasons.

    Finally, greater accountability for banks. If we are going to bail them out, we need to see greater accountability. The money they get should come with strings attached. Maybe a more frequent visit from their regulator, I don’t know. However, healthy institutions like mine should not be subjected to further government oversight. It is a giant pain in the neck, and we have consistently demonstrated high asset quality and have skirted everything other than a slowing economy.

  3. Daisy said:
    on October 16th at 04:56 pm

    This article is a bunch of crap and is misleading. You’re manipulating the statistics in an attempt to scare the average Joe into believing the government is again trying to help the wealthy. I’m guessing your’re right up there with some other idiots blaming Wall Street for the economic mess too because you don’t actually understand what is going on (subprime borrowing taking out loans they never intended on paying back!). Let me guess….you also think its “patriotic” for people making over $250k to have their tax rate increased significantly in effect redistrubuting wealth.
    Increasing FDIC insurance coverage does not help only 1.6% of the population. It also helps people who have multiple smaller accounts at the same bank that add up to over $100k. Also crap…98.4% of current deposit ACCOUNTS may well be insured but that does not mean 98.4% of deposits DOLLARS are insured. Clearly you can see that only half of deposit DOLLARS are insured so increasing FDIC insurance to $250k or higher helps significantly more than 1.6% of the population. The number of accounts is irrelevant. How many people have accounts with minimal and insignificant balances simply because its easier than bothering to close the account?? Also- the increase in insurance cost to the bank when spread over all its deposits is really insignificant. I’m willing to pay an eighth or quarter of a basis point for the convenience of keeping $250k at one bank instead of having to spread it over multiple banks to ensure it is FDIC insured. I can go on and on about the flaws, omissions, etc in your piece but its a waste of my time.

    To “NEXT PRESIDENT”….I’m sorry that you’ll never have more than $10k to invest in any bank but as with many other people I’m sure that is a function of the choices you made (or lack there of). I’m sure that most people who put the effort in to educate themselves and acquire valuable skills have over $10k to invest. I’m tired of hearing of the “working people” who can’t seem to afford everything they want or can’t afford to raise their kids. People make money according to the education/skills they CHOOSE to acquire. Yes…CHOOSE to acquire. There is a reason people spend years in college/graduate school and choose to have children only once they are finanically stable enough to be able to afford such a luxury and as a result don’t have to complain about not having money. ANYONE that grows up in the US has the opportunity to make a good living if they choose to. Its unfortunate that you perhaps made poor choices and now say that as a “working guy” you will never have more than $10k to invest but I don’t feel sorry for people who CHOOSE to build a poor foundation for their future.

  4. Travelinator said:
    on October 16th at 07:29 pm

    If Mr. Wu wants FDIC to protect his new fortunes from this blog:

    – FDIC $250,000 means Mr. Wu needs to split his money into 60 banks.

    – FDIC $100,00 means Mr. Wu needs to split his money into 150 banks.

    I wish I had such problems.

  5. Johns Wu said:
    on October 17th at 12:58 am

    OR you could get CDARS (www.cdars.com) and have millions in FDIC insurance with just 1 bank.

  6. Shea said:
    on October 17th at 04:56 pm

    Ian-

    CRA was the start…read this-

    http://pallante.typepad.com/we_the_cared_for/2008/09/governments-social-engineering-a-key-to-the-credit-crisis.html

    If you have other facts I’m all ears. It’s obviously not the only reason but was the first bad decision in a mile long line of bad decisions. “In compliance” is a funny term…in compliance doesn’t mean good decision.

    As you can see so far, this “Sell Out” hasn’t freed up the credit markets. The government will have to come in and force your bank to start lending…that was the purpose of the “Sell Out” wasn’t it?

    Daisy-

    It seems you’ve studied the data and have the numbers to back up your arguement. Could you share them with us? As the author said, averages can skew the analysis…but lets not forget the point here. Is banking a service or a right? Are banks businesses? I should not be paying MORE for OTHERS to feel security. Am I not being patriotic? If YOU have $250,000 + that you want to keep in the bank then YOU pay insurance for that SERVICE.

    I agree that everyone in this country has the chance to make money and have $250,000 if they choose to. You contradict yourself when sarcastically saying “Let me guess….you also think its “patriotic” for people making over $250k to have their tax rate increased significantly in effect redistrubuting wealth.” The “Upper Class” should not be paying higher tax rates to help the “Middle Class”…and people should not be paying higher rates/fees so people (other than themselves) can keep $250k + with one bank…would that be patriotic?

  7. NancyS said:
    on October 17th at 09:02 pm

    Travelinator writes:
    “FDIC $250,000 means Mr. Wu needs to split his money into 60 banks.
    – FDIC $100,00 means Mr. Wu needs to split his money into 150 banks.
    I wish I had such problems.”

    Just because you don’t have $100,000 or more, doesn’t mean that those who do are wealthy. Imagine being 70, living on a fixed income, and only having $100,000 to your name. I’m not talking about an IRA, but I do not consider $100,000 to be a large sum of money. If someone gets sick and doesn’t have insurance, that money would be gone in a flash. If someone loses his job or becomes disabled, that money can disappear quickly. This new limit is very helpful because the smaller banks can get more business. It might change the “bigger is safer” feeling which is good for competition.

    By the way, over the past several years, seniors have lost millions in retirement savings because the interest in an account often exceeded the $100,000 limit. They were not rich by any means. It’s always been very easy to be insured for a lot more than $100,000 by asking the bank rep to add the title “ITF” (in trust for) or “POD” (payable on death) to an account with a list of qualified beneficiaries. Unfortunately, many people were not aware of this, since they never bothered to read the FDIC regulations or even ask about them. That;s what I don’t like about large banks. A personal banker would red flag such an account or advise the depositor of his limits. Unless you’re an only child with no living siblings, parents, children, grandchildren or a spouse, then you’ve got to have at least a couple of qualified beneficiaries. When you list a beneficiary that will inherit your money if you die, your account becomes a revocable trust which, unless you drop dead, means absolutely nothing, but it increases the FDIC coverage substantially. I have every penny in a POD account, including my $500 checking account, so it doesn’t go into probate if I die. Doesn’t mean I’m wealthy, just responsible.

    Anyway, the Mr Wu you are talking about probably would use a CDARS partner so he wouldnt run around so much.

    Shea writes: “Debmc, it’s not just helping 1.6% of American’s, it’s hurting ALL Americans. How are the banks going to pay for the extra insurance? ”

    Obviously you aren’t aware that there has been unlimited coverage at many banks for years. In Massachusetts, for example, every chartered savings bank or cooperative bank has SIF or DIF. Mabe that’s why the interest rates in MA are so low. (I have relatives in MA) but you can always open up an account elsewhere by mail or online if the bank allows it. I live in FL and have had CDs in Nebraska, Ohio & Iowa. FDIC is private, so I don’t know why everyone keeps saying we are paying for the increase with our taxes. It is not funded by income tax, but by insurance premiums paid by the banks. The extra desposits many banks will enjoy might offset the costs. Right now the increase is only until Dec 2009. I assume that’s why I’ve seen a few 14 month CD specials.

  8. Travelinator said:
    on October 18th at 01:48 am

    Hey Hedge Fund Manager, Enjoy your riches you treasonous pos. What goes around comes around weasel. May every cancer known to man ravage your body and your family. You short selling slime balls are also a large reason for the mess we are in with your slimy rumors and piling on tactics.

  9. J said:
    on October 20th at 06:17 pm

    1) All insurance should be privatized then people could pay for only what they need/want . sound too “American” for the Obamaites out there?? 🙂

    2) Dont ever ever be down on the wealthy IF YOU LIKE MONEY/FREEDOM

    It is the wealthy who are the last to be afffected in downturns, RIGHT? RIGHT!

    So they are the only ones that can keep all others employeed.

    We know everything rolls downhill and I GAURANTEE YOU THIS

    who do you think has made more millionaires in this world, THE BILL GATES OF THE WORLD OR YOUR LOCAL WELFARE MOM ON HER 5TH BABY?

    stop the nonesense and grow up America

    MONEY = FREEDOM
    2 THINGS ANY SANE ( this MIGHT BE THE OPERATIVE WORD) person wants

    All others who talk down the wealthy etc at best HAVE NO CLUE or are afraid that others are “PASSING THEM BY” AND DONT HAVE THE CONFIDENCE n themselves

    Lets not let the tail wag the dog anymore in this country, YOU SEE WHAT THAT REALLY GETS US!!

  10. soybean1333 said:
    on October 24th at 01:32 pm

    Your an idot!!!!!!! You are ignoring your own chart. 1.6% of the accounts have 50% of the total money. If this get jerked, what happen to the 98.% of the little guys?

  11. Professor said:
    on October 31st at 05:16 am

    Well the 250k was nice, but the real improvement was in gettng rid of who was a qualified beneficiary. After losing 800k in stocks I am happy that my 2m is now insured.

  12. Mark said:
    on November 5th at 01:03 am

    Take a look at this post. Don’t worry, the supposed 1.6% don’t have time on their side.

    http://www.crackinsurance.com/2008/11/04/fdic-insurance-sunset-provision/

  13. Joe said:
    on November 7th at 08:51 am

    The data presented is pretty meaningless. Most wealthy people have already spread their cash among different institutions so that it is insured. More likely is that the 1.6% are small businesses, and if they lose their cash will file bankruptcy and lay off workers

  14. Mark said:
    on November 11th at 06:46 pm

    The analysis is so myopic in view it’s almost hilarious the article was even written. As a person who happens to have more than $100k in cash, I would sure NEVER have let more than $100k be in any one account at a given point in time, so I guess I’d be considered in the bottom 98.4% of account holders.

    Secondly, if you have any clue how banking works and what’s going on in the marketplace you’d realize that keeping high value accounts in bank is CRITICAL to running a bank. Banks make money (traditionally) by taking borrower deposits and loan them back out. If everyone pulls their capital out (especially those w/ more to pull out) they have less to lend. Less to lend to homeowners, commercial property owners, and business owners. Everyone knows the easiest way to boost returns is to BORROW and LEVERAGE what cash you have. No borrowing = reduced returns = reduced risk taking and GROWTH.

    The last point is the fact you point out this doesn’t help the middle class. Same myopic vision that our president elect has. If anyone really thinks that taxing small business owners who make over $250k a year an additional 4% ($10 for every $250k they make) doesn’t come RIGHT OUT OF THE POCKETS of everyone else – you’re crazy. Like small business isn’t going to 1) raise prices to boost profits and makeup this shortfall or 2) cut expenses (employees). Who’s then going to be out of a job – the ‘middle class’.

    Take the blinders off and let’s see the bigger picture. The $250k increase has incentivized me to consolidate accounts and given me more confidence my HARD EARNED (key word EARNED) capital doesn’t dissappear in a bank collapse). I’ll now leave these $$s in an account and allow the bank to lend them out (to small business and homeowners). The whole LIQUIDTY CRISIS / CREDIT CRUNCH has EVERYTHING to do with banks NOT LENDING money. This move helps increase that ability. 100% off base article, sheesh.

  15. Sam said:
    on November 13th at 04:54 am

    I don’t think the point is to save the 1.6% Americans with higher FDIC insurance or not. The point is that this kind of news makes everyone feel safer. Everyone has talked about this $250K limit increase. The goal is not to create mass panic and widthrawals because of the news of bank failures.

  16. Bankaholicaholic said:
    on November 13th at 10:35 pm

    LOL just reading these comments and hey Johns, I think you should start moderating them. You run a respectable business and need to make sure your brand reflects that. One nice thing to add to your site may be a reputation system. It will keep the discussion shall we say more civilized.

  17. Jeff said:
    on November 17th at 04:46 am

    The article focuses on the wrong number. Slightly more than 50% of the money deposited are in accounts with more than $100,000. So if the people with those accounts (presumably the 1.6% mentioned) get nervous and withdraw their uninsured money, then 1.6% of the people can create a run buy withdraw more than 50% of the funds.

    The goal was to prevent runs on banks. FDIC insurance was created to create confidence in people so that runs on banks don’t happen.

  18. Richard said:
    on April 24th at 08:19 pm

    The increase in insurance was not implemented to benefit the wealthy but rather to avoid the “wealthy” withdrawing their money from the banks. It would be a very unwise person who keeps money in a bank account paying negligible interest if that money is at risk (i.e., not insured). Flow of money out of a bank to a safe deposit box or home safe would create a “run on the bank” leading to failure. That is what the government is trying to avoid by increasing the limits.