People with more than $100,000

sephiaSeptember 17, 2008

I have what might be a silly question.

I live in a condominium that has a homeowner's association. The latest set of meeting minutes just came out. I noticed in the financial section that the Board of Directors has $138,000 in a checking account - not sure what bank. Not an on-line bank though. Also, if it makes any difference, the homeowner association is a not-for-profit organization. With FDIC only insuring up to $100,000, would the association lose the $38,000 if the bank went belly up? Or does it matter that it is a not-for-profit organization? I've repeatedly suggested that they not keep over $100,000 in a checking account - to no avail. I do know that, according to our governing documents, that the money cannot be tied up in a CD for more than a year, and that it can't be invested, say in mutual funds or the stock market.

Where do people keep money if they have more than $100,000?

Thank you for reporting this comment. Undo

The FDIC insures $100,000 per person per bank, in general, so if you just use two banks for the money, you can insure it all. Different classes of accounts within the same bank may also be insured separately, so you can have more than $100,000 at a single bank and still be insured.

    Bookmark   September 18, 2008 at 1:44AM
Thank you for reporting this comment. Undo

In the worst case scenario, your condo association would have 38k at risk. In a bank failure, getting back any of the uninsured funds depends on whether enough money is available after the assets of the failed bank are sold.

Aside from using different banks, I don't know how many classes of accounts are available to corporate entities like HOAs. But for individuals...

... a married couple could each open an individual account (up to $100,000 in each), a joint account (up to $200,000), two separate individual retirement accounts ($250,000 each) and two revocable trust accounts, payable on death, naming each other as beneficiaries ($100,000 each). Together that is more than $1 million of insured deposits.

As an individual, I've always liked Treasury notes as a good place to park money until something better came along - they're looking even better now by simply being safe as opposed to generating a big rate of return.

    Bookmark   September 18, 2008 at 11:54AM
Thank you for reporting this comment. Undo

Aside from using different banks, I don't know how many classes of accounts are available to corporate entities...

This is a very good point. Most businesses are much more limited than individuals with respect tot he ability to 'retitle' deposit accounts to achieve more than $100k of coverage at a single institution.

I would say if the financial institution is well capitalized, the money is fine where it is, since banks often pay premium interest rates for large deposit balances.

I also think duluthinbloomz's idea about investing the excess in a treasury note is an excellent idea.

    Bookmark   September 18, 2008 at 12:29PM
Thank you for reporting this comment. Undo

I hope that they're using a small bank.

If a small bank (or several) goes/go broke, FDIC funds will be able to cover.

If a big bank goes belly up ...

... good luck.

That so-called guarantee won't be worth much.

On the other hand ...

... Bush and buddies may bail them out, as well.

But - the U.S. owes huge amounts abroad.

Quite likely the foreign owners of capital will want a higher interest rate to seduce them into being willing to loan more to the U.S. (especially with the value of the dollar against several foreign currencies shrinking).

Too bad they can't invest in foreign-denominated currencies.

65 cents U.S. would have bought CA$1.00 about five years ago ...

... recently it has taken about 93 cents.

And about 6 months ago CA$1.00 would have cost you about US$1.08.

Many of us think that we haven't seen the last of the financial crisis in the U.S.

ole joyful

    Bookmark   September 18, 2008 at 7:55PM
Thank you for reporting this comment. Undo

Actually, the dollar has been on a tear, rising 10% before it took a breather.

There is plenty of liquidity in the world, even in the US. The problem is that liquidity has frozen like a scared rabbit in its tracks due to emotional fear and big institutional uncertainty. The LIBOR spread for some companies - LIBOR is the standard interest rate for intercompany borrowing - is approaching ridiculous heights, hence the Russian close-down of their markets and the UK and US short-term halt to short-selling.

It is pretty much accepted from most pros that while the rest of the world is beginning to slow - notice China has reversed course 180 degrees and is now encouraging growth! - the US is already well on its way to working through its credit uncertainties.

As one CNBC commentator remarked, it's ironic how it's always the people that demand less regulation who cause the biggest regulatory messes that then make them cry out for 'more regulation!' When Charlie Gamborino reports that even traders are telling him we need more regulation - they all seem to agree that the uptick rule needs to be reinstated, for instance, as well as a rollback of the 2004 SEC decision to remove the 16:1 leverage rule that initiated this great wave of over-leveraging - these are times that make even a free-market capitalist like Paulson or Larry Kudlow acknowledge that government intervention is necessary to calm the markets.

People with memories of twenty years ago might recall when S&Ls were failing and banking equities slid to precipitously low levels, Prince Walid bin Talal of Saudi Arabia rescued Citibank with a cash infusion. Almost single-handedly it turned the market around and we've had two huge bull markets. The "floor" of the Dow continues to rise overall. When we fall below 11K these days it's news - but not that long ago the "floor" was 5K. Then it was 8K...etc.

The trouble with the increasing consolidation and global exposure is that there is now a very big gap between the biggest and the regionals. When the biggest get that big, it will usually require government intervention because the global financial investment community knows they can play the game of chicken and win. Anytime you need someone more than they need you, you've got them over a barrel.

Lehman's investment banking unit wasn't worth anything to Barclays until Lehman went into receivership and they could pick it up for a song without acquiring Lehman's Level 3 portfolio. Those assets are worth something - at least the 22 cents on the dollar that Merrill took chargeoffs for - but this way Barclays doesn't have to raise any capital, they can just cherry pick US assets. The global community salivates at the idea of being able to pick up Goldman Sachs or JP Morgan Stanley if the market had continued its death spiral.

Oops, sorry I got so OT, though! I'd suggest to the OP that they remind their HOA that if that money is an interest bearing account, that the $100K limit includes deposits, accounts AND interest, so they risk not being reimbursed for interest if the principal itself is at $100K. They might want to take the account down to $90K, for instance, and put the remainder in a second institution, so they don't risk being over the FDIC limit.

    Bookmark   September 19, 2008 at 11:48AM
Thank you for reporting this comment. Undo

If you have two accounts in the same bank, one for one hundred thousand and one for less, would they both be covered should the bank fail or would both be covered?

    Bookmark   September 20, 2008 at 9:12AM
Thank you for reporting this comment. Undo

Here's what's covered straight from 'the horse's mouth'...


Here is a link that might be useful: FDIC Insurance

    Bookmark   September 20, 2008 at 10:35AM
Thank you for reporting this comment. Undo

In some instances the FDIC will insure more than the 100K minimum. Check the FDIC website for more details.

Also, if memory serves me correctly, the FDIC has, since its inception, paid every cent lost to bank customers, regardless of the 100K minimum.

    Bookmark   September 29, 2008 at 1:19PM
Thank you for reporting this comment. Undo

That should be 100K maximum for FDIC coverage guarantee, shouldn't it?

ole joyful

    Bookmark   September 30, 2008 at 4:25AM
Thank you for reporting this comment. Undo

FDIC insurance increased to $250,000.00 on Oct 3rd, 2008.

    Bookmark   October 12, 2008 at 2:38PM
Thank you for reporting this comment. Undo

It increased to $250K for one year only, I believe. You can have more than one $100K account covered by FDIC depending upon how you title the various accounts, so follow the FDIC rules as outlined on their website carefully!

    Bookmark   October 13, 2008 at 1:42AM
Thank you for reporting this comment. Undo

"so follow the FDIC rules as outlined on their website carefully!"

Thats right, especially the fine print!

Here's an article with a little food for thought regarding how many banks the FDIC might be able to rescue if push comes to shove.

Financial Sense
How Safe is My FDIC-Insured Bank Account?
by Dr. Chris Martenson : April 14, 2008

Your bank account may not be as safe as you think (or hope). Taking a deeper look at the legal details and the financial depth of the FDIC reveals several troubling details that call into question how the FDIC would fare during a true banking crisis.

The US is coming out of a period of unusually low banking stress and failures. Since it is typical human behavior to let one’s guard down during tranquil periods, we might legitimately ask if this has happened with respect to the FDIC.

Before we address that though, we probably should understand bit more about the FDIC. There’s a fair bit of both good and bad information about the FDIC floating around out on the internet, so I thought we could stick to the facts. In this article I even go straight into the language of the 1933 FDIC act itself so that you can decide for yourself whether it’s worth spending any of your precious concern on this matter.

What is the FDIC?

Let's begin with a snippet from Wikipedia on the FDIC:

The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933. The vast number of bank failures in the Great Depression spurred the United States Congress into creating an institution which would guarantee deposits held by commercial banks, inspired by the Commonwealth of Massachusetts and its Depositors Insurance Fund (DIF). The FDIC provides deposit insurance which currently guarantees checking and savings deposits in member banks up to $100,000 per depositor.

Accounts at different banks are insured separately. One person could keep $100,000 in accounts at two separate banks and be insured for a total of $200,000. Also, accounts in different ownerships (such as beneficial ownership, trusts, and joint accounts) can be considered separately for the $100,000 insurance limit. The Federal Deposit Insurance Reform Act raised the amount of insurance for an Individual Retirement Account to $250,000.

The two most common methods employed by FDIC in cases of insolvency or illiquidity are the:

• Payoff Method, in which insured deposits are paid by the FDIC, which attempts to recover its payments by liquidating the receivership estate of the failed bank.

• Purchase and Assumption Method, in which all deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank's loans (assets).

In short, if your bank gets in trouble, the FDIC will ride in and either pay off your account (up to $100k), or sell your bank off to another bank which will then assume the usual duties of your bank. Under normal circumstances, a bank failure should not impact you in the least. But these are not normal times. We might reasonably ask how the FDIC would respond during a major banking crisis. After all, this is our money we’re talking about. Faith and hope are great at weddings and sporting events, but they should not form the basis of our strategy for handling our finances.

How many bank failures could the FDIC handle at once?

When we take a look at the financials of the FDIC (Figure 1) we see that the level of insurance (in circles below) is not terribly high either, when viewed as an aggregate amount (in blue) or on a percentage basis (in red).

Figure 1.

The 1.22% Reserve Ratio means that for every dollar in your bank account, the FDIC has 1.22 cents “in reserve” ready to cover your potential losses. This has proved to be an ample amount during the period of stability we’ve recently had, but it doesn’t seem particularly significant, considering the recent headlines about banking losses (Spring of 2008).

Consider, for a moment, the collapse of Bear Stearns. In order to assume that bank, JP Morgan asked for, and received, a special waiver from the Federal Reserve to keep $400 billion of suspect of Bear Stearn's assets off the books of JPM (page 4 of the linked document). While JPM may have been padding the books a little bit here, due to the uncertainty of how bad the wreckage might turn out to be, $400 billion dwarfs the $52 billion reserves of the FDIC.

If one medium-large bank collapse could wipe out the FDIC by a factor of nearly 8, what do you suppose would happen if there were multiple, simultaneous bank failures? At this point, my guess would be that Congress would be sorely tempted to borrow additional funds to remedy the situation, but I worry that hardship and losses might result while the laws were amended and sufficient funding avenues identified. So how many bank failures could the FDIC endure? The data suggests slightly fewer than one big one.

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? I 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 âÂ" an act of Congress.

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

A link that might be useful:

    Bookmark   October 14, 2008 at 11:11AM
Thank you for reporting this comment. Undo

One more thing...

FDIC Bank Deposit Insurance (United States):
Some Things you did not Know (and Should)

Many people have written to us asking about the safety of banks outside the United States. Obviously, most of these questions have come from Americans who are trying to make a comparison between FDIC, or government bank account insurance, and any similar type of insurance or bank safety programs. While having a government insurance program in place to protect depositors is a wonderful idea, one should be very clear about exactly what kind of coverage exists (and if the government sponsored insurance company is financially solvent or capable of addressing a true banking crisis). We only mention this because, while FDIC allows many people to sleep better at night, as a solvent insurance company, in my opinion FDIC is somewhat of a sham. In the least, it is certainly NOT what most people think it is.

How many Americans knew that the FDIC Bank Insurance Fund (BIF) was broke in 1991, to the tune of negative US$ 7 Billion Dollars and also broke in 1992 to the tune of US$ 100 Million Dollars? Not only was the bank insurance fund insolvent in these years, it was in debt!

Also, as of 1998, for each US$ 100 Americans have on deposit with US banks, the FDIC can only cover US$ 1.38 if all US banks (covered by FDIC) go under.

Now how comforted are you, knowing your account is covered by FDIC insurance? See the FDIC's own statistics here:";

A link that might be useful:

    Bookmark   October 14, 2008 at 11:17AM
Sign Up to comment
More Discussions
Refinance with Bank of America taking F-O-R-E-V-E-R
We started the process for our refinance April 25th...
What is the fair ratio?
The living expense is paid between the couple (Husband...
Spending Breakdown
My wife and I have tracked our spending over the last...
Tiny pension - Taking lump sum or monthly annuity payment
I just received a notice from a previous employer asking...
Programmable Thermostat proof
Does anyone have hard copy proof of the savings that...
People viewed this after searching for:
© 2015 Houzz Inc. Houzz® The new way to design your home™