Bad Moon Rising Economic Alert 3a - update
July 16, 2008
The Meltdown Continues

Contents

IndyMac Failure and the FDIC $100,000 insurance limit

Just as the Federal Reserve Board was dealing with the near-failures of mortgage guarantors Fannie Mae and Freddie Mac, the federal government's Office of Thrift Supervision (OTS) stepped in and declared the bankruptcy of IndyMac, a major California savings and loan bank. It is the second or third largest bank failure in U.S. history, depending on which news source you use. At $32 billion in assets, it's going to be a whopper to pay off its depositers.

U.S. Senator Charles Schumer, D-NY, is being blamed for the failure because, as a Senator involved in several committees on banking, he sent a letter to the OTS with his concerns about the financial condition of the bank. Word of the letter got out, and account holders withdrew a billion dollars in deposits.

Blaming Senator Schumer for the failure is akin to blaming a fire on someone who notices smoke and calls 911. The Senator was just doing his job.

Sadly, some account holders had more than $100,000 in the bank. The FDIC only insures deposits up to $100,000. Those with more will only be paid half of the amount above $100,000. So if someone had, say, $300,000 in life savings, they'll only be getting $200,000.

No one from the bank or the federal government told these people that their deposits were in trouble. And, according to the latest government data, nearly 40% of the money in U.S. bank accounts is uninsured. This is stupid and criminal. All banks should be required to notify their account holders if their accounts are over the FDIC limits, and the federal government should be required to send the same notice to all US residents.

If you have bank accounts totaling more than $100,000 at any bank, please move some of your funds - as soon as possible - to other banks so that you have no more than $100,000 at any one bank.

There is no way to know which bank will be next. Big banks and small banks, mortgage companies and brokerage houses. They are all vulnerable.

Note to FDIC: Please don't blame me for a bank run. I am just informing people of their rights.

References:

Ari Levy and David Mildenberg, IndyMac Seized by U.S. Regulators; Schumer Blamed for Failure, Bloomberg, July 12, 2008

Mike Steinhardt, IndyMac Failure - Test of FDIC Insurance, Seeking Alpha - Stock Market Opinion & Analysis, July 15, 2008

Standard Disclaimer: The information above, Bad Moon Rising Alerts, and the Bad Moon Rising Reports do not constitute financial advice, but are condensations and distillations of the work of others and a few words of what I believe to be common sense. Please seek out an independent licensed accountant or financial advisor to review the information and references I have provided as well as their own expert knowledge, in order to tailor a financial plan to your circumstances. I cannot be held responsible for the consequences of decisions made based on the information I provide. If I suggest that you stop playing the lottery to save money and your number comes up, don't blame me.

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