Housing Doom

Given the paltry rates paid by banks anyway, may I suggest First National Backyard Jars or maybe even Valley Mattress Bank.

Seriously, though, I think it’s reasonable to assume the Treasury will back deposits when the FDIC insurance runs out (next week???). Then it just becomes a matter of the price (rate) that the Treasury pays on the bills/notes/bonds it has to sell to raise the cash to cover the deposits. Not good for dollar bulls or deficit hawks. But…if you assume that you may have liquidity issues at WAMU if/when the Feds get involved…if you buy a money market fund that invests exclusively in government securities, I think there is a relative amount of safety plus liquidity. My two Ameros.

PS Another related issue in all this is the payment of interest at troubled institutions; again, if/when the FDIC gets involved, they may not pay out all “advertised” interest if they believe that the underlying troubled institution was “bidding” for deposits with a higher advertised rate (because it needed the money to stay afloat). Just something else to be cognizant of while the hurricane continues.

billydlight -

Thanks for the kind words (I try to be entertaining ) I knew about the Mayan Calendar thing. In fact there is a cluster of stuff pointing to something in the ‘11 / ‘12 time frame. I even invented one myself, the double-double long wave 1777 -> 1855 -> 1933 -> 2011 (?) -> … initiated by the dates of Gauss.

More relevantly, here’s another take from the heartland on the present topic.

“Banks seek to reassure customers their money is safe”, by Anne Wallace Allen, Idaho Statesman, July 14, 2008.

If you’re worried about the security of the money you’ve deposited in a local bank, you’re not alone.

The credit crisis rocking the nation’s lenders has banking customers in Boise seeking a safe place to keep their money.

“The psychology has changed,” said Rob Perez, who after 29 years as a senior vice president at U.S. Bank opened his own bank, Western Capital Bank, just three months ago.

“People are no longer saying, ‘How high are my returns?’ They’re saying, ‘How safe is my money?’”

In the 80’s I worked for the RTC. We went in after the FSLIC (the savings and loan version of the FDIC) to liquidate an S&L’s assets. The FSLIC as does the FDIC could theoretically close a bank for up to 30 days before depositors can get their money. They can close it longer with congress’ approval. The longest closure that I recall was 15 days for an S&L with poor record keeping. Most were for no more than three days. Indymac Bank was only closed one day (Saturday) as it reopened on Monday. The people we saw on TV standing in line at Indybank either had more than $100k in their account or were unreasonably scared. Ironically, Indymac Bank is arguably the safest place to keep your money now that the FDIC has taken it over!

The point is that for less than $100k (and there are other permutations of this amount including $250k in an IRA) you are perfectly safe. The failure of the common depositor would lead to a financial collapse of the economy, and the government has always backstopped the FDIC. However, it would be prudent to have at least two accounts at different banks if you have any doubt about the future of yours. This way you can be assured of access to cash in case your bank is closed for a week or two.

Tobby (#5) -

Last summer there was an ugly bank run in Britain (their first in 141 years!) and over a few days there was the beginnings of one at Countrywide in the US. Bert Ely (a fine banking analyst who I trust implicitly — ties to AEI for what it’s worth) was widely quoted then as asserting the FDIC insurance was perfectly sound, and I think he’s right. At any rate he and a few others managed to calm nerves at that time, and the Countrywide buyout proceeded in a more-or-less civilized fashion. You’ll recall from my comment to a recent Doom post that they’ve been on this case for at least a year and a half, and likely more than that. I expect that part of the center to hold.

Check out this March posting for links for bank ratings. Where it says “let you pursue this further” and “Veribanc.” At the first link be sure to get the snapshot of your bank in a PDF file and check its liquidity.

Also check out this post from TheStreet.com ratings for the strongest and weakest banks in the nation (updated June 20).

Note that Downey savings was rated A- in March, but I think it is D now. Without adequate liquidity, a bank can get in trouble quickly.

Tobby-

Actually the FDIC has been bailed out before.  I ran across this article from March 1992.  I don’t agree with all the author’s viewpoints, but when he discusses conditions at the time, you get the feeling that we’ve been down this road before.  Here’s what he said about bailing out the FDIC:

As I write, Congress is in the midst of considering funding for two massive bailouts of failed and failing banks. The bailout of the Resolution Trust Corporation (RTC) will provide $80 billion to support failed thrifts, on top of the $80 billion which has already been appropriated for that purpose. The bailout of the Federal Deposit Insurance Corporation (FDIC) comes before Congress in the guise of two loans, one of $30 billion for a Treasury line-of-credit to the FDIC, another of $40 billion in "working capital," which is supposed to be paid off by selling the assets of failed commercial banks. Congress, then, will be voting to provide $150 billion in banking bailout money this November.

Here’s what he said happened:

All through the 1980’s a speculative fever was encouraged and indeed supported by the triple pillars of Reaganomics: rapid deregulation, the pursuit of short-term profits, and the exploitation of a financial leverage made available by using borrowed money to speculate. This rampant, unbridled speculation enabled both businesses and such major business investors as banks, real estate entrepreneurs, corporation executives, and stock and bond underwriters and arbitrageurs to make huge profits on their investments, which were all too often funded by money borrowed from banks.

When the speculative bubble burst in the Southwest and shortly afterward in New England, businesses and investors walked away from their losses by handing them–and the highly leveraged, nearly worthless properties and stocks they had used as collateral–to banks. The insurance agencies chartered by the government quickly ran out of money to cover the losses. (Since the banking crisis of the Great Depression, deposits in both savings and loans and commercial banks have been covered by insurance, which in turn has been backed by the "full faith and credit" of the United States government.) The responsibility for making good the money lost by bad loans to corporations, wealthy investors, and speculators was passed on to the Federal Savings and Loan Insurance Corporation (FSLIC) and to the FDIC, and ultimately to the taxpayer.

You’d think Americans could remember back that far, wouldn’t you?  Sadly, I think this time around will be bigger and badder.

Kyutie-

You used my favorite word, “research”.

It is so easy to get burned when you make financial decisions based on info you obtained from just one source- too often “buy now” or “invest here” advice is based on the fact that the giver profits from it.

Knowledge is power- and consequently is rarely given away. Kudos to you for taking the effort to find it for yourself.