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A Broke FDIC Expands Checking Account Insurance From $250,000 To Infinity
A few days ago, the FDIC, broke as ever, with a Deposit Insurance Fund that was well south of zero at last check, announced, with delightful irony, that it was expanding its insurance on non-interest bearing checking accounts from the current $250,000 to, well, infinity. As in there is no upper limit on how much the FDIC would insure - the fact that it has no money at the FDIC to begin with being completely irrelevant. That's right, the broke FDIC basically said that it would guarantee up to $480 billion currently sitting in US checking accounts between December 31, 2010 and December 31, 2012. Yet is this nothing less than another Volcker-inspired plan to get capital out of multi-trillion money market industry and into consumer hands via easily accessible transaction accounts, and to encourage spending on useless trinkets like iPads? This could very well be the case.
As many will recall, earlier this year the Group of 30, headed by Volcker, came out with a recommendation to allow money market to suspend redemption without prior notice. We, along with many others, speculated that this was merely an attempt to spook MM investors into stocks. Well, it succeeded... half way. Investors did indeed take out money from mutual funds, whose current after-fee 7-day simple yield on prime funds is just 7 bps. However, they then used that money to buy not stocks, but fixed income, instead focusing on such securities as Investment Grade bonds and Treasurys. As a result the much expected ramp in stocks never really occured, and it was up to the Fed and the HFT mafia to keep ramping stocks as ever more outflows exited dometic equity mutual funds.
This latest action by the FDIC, as Barclays' Joseph Abate speculates, is nothing less than a comparable attempt to get Americans to take out theyr cash from money market funds and, now that the whole equity investment avenue is closed, to put it into checking account instead, hoping that once the money is one step closer to the end consumer (as it will reside in non-interest bearing transaction accounts), and easier to withdraw, the psychological element will be one of spurring consumption. Yet will this latest scheme to impact mass consumer psychology work? If past experience is any indication, the desired outcome will once again fall well short of the actual.
More details from Joe Abate on this latest scheme by the FDIC:
The FDIC recently released details about the Dodd-Frank financial reform bill’s requirement to provide temporary unlimited deposit insurance coverage. Unlimited deposit insurance would apply only to non-interest-bearing transaction (checking) accounts. It would be provided to all depositary institutions – there would be no opt-in – and importantly, there will be no explicit charge to the banks for the extra insurance. That is, unlike the similar Transaction Account Guarantee (TAG) program, there would be no special assessment or insurance premium for the coverage assessed on quarterend balances over the current $250,000/account limit. Instead, the FDIC will price its regular risk-based quarterly assessments to account for the additional insurance. But assuming the FDIC proposal goes through without major changes, the entire $480bn currently sitting in US checking accounts would be fully covered for the period between December 31, 2010, and December 31, 2012.
No discussion on just how the FDIC will insure not just all this capital, but all continue with its $100,000 insurance of traditional interest checking accounts, considering that the FDIC is broke. After all, if it gets to insurance getting actually paid out, it will be game over.
But of course, it is all about expectations. Which is why Abate believes this is merely a ploy to get money market holders to transfer their money from MMs to checking accounts, after conducting an appropriate cost-benefit analysis.
Unlimited transaction account coverage – even if temporary – poses a challenge for money market funds. At current levels, the average after-fee 7-day simple yield on prime institutional money funds is just 7bp. Thus, besides the insurance coverage, there is little difference between money fund accounts and checking account balances. Traditionally, this has not been the case, as money funds typically yielded more than bank deposits in order to compensate depositors for the absence of (limited) deposit insurance. On the surface, then, the provision of unlimited deposit insurance on a close substitute that also yields (close to) nothing could encourage institutional investors (those most likely to exceed the current $250,000 deposit insurance limit) to shift their balances back into banks.
Despite these super-low rates, money fund balances have held fairly steady since late spring. We suspect that part of the stability may reflect the fact that among institutional investors, the current amount of deposit insurance coverage ($250,000) is not sufficiently high to shift their cash allocation to banks. With only that level of coverage, institutions may feel more secure holding their multi-million dollar cash deposits at money funds, where the fund manager’s commitment to a stable net asset value acts as a weak form of insurance.
It is possible that unlimited transaction account insurance might tip the balance sharply in favor of checking account balances over money funds. If institutional investors prefer the FDIC’s explicit guarantee to the money fund sponsor’s promise to maintain a stable NAV, then money fund redemptions could increase. The pace of redemptions – if any – would ultimately depend on what value institutional investors place on having explicit principal protection. If this isn’t worth the 7bp they earn after fees on money fund deposits, they may stay put. But according to a recent Federal Reserve working paper, institutional money fund investors tend to be fairly flight prone – pulling their deposits quickly at the first sign of financial distress. (“The Cross Section of Money Market Fund Risks and Financial Crises,” P. McCabe, Federal Reserve Board working paper, September 2010.) This suggests a fairly strong sensitivity to principal protection over yield among the $1.2trn in institutional money in stable net asset value funds. As a result, some portion of these balances could leave for bank checking accounts. Of course, the value of insurance becomes apparent only in a crisis. As a result, with financial markets stabilizing, it’s possible that institutional money has become less flight prone. If true, the value of the FDIC’s insurance coverage might not be worth much for institutional investors. Until the insurance coverage takes hold at year-end, though, it’s not clear how much of the $1.2trn in institutional money fund balances could depart for banks.
We continue to be surprised by the eagerness of the administration to forcefully evacuate prime money market funds. The aggressive insistence to make life for MM investors a living hell, can only mean that should the true NAV of the majority of money markets be disclosed it would make the "breaking the buck" incident which nearly destroyed the system more than anything else in the days after the Lehman collapse a daily event. We hope we are wrong about this.
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Remember that story about about a month ago?
The FDIC I believe will start taking over banks outright. Absorb them into the Federal Goverment. Like Fannie and Freddie.
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FDIC Insider in Illinois Reports Diminishing Bank Merger Possibilities
Now, I can't speak for what is happening around the U.S. but my friend states that in Illinois, they are finding it more and more difficult to find banks that want to help out. That is, the banks that formerly had wanted to purchase other banks have done so and are not interested in buying any more banks. To put it bluntly, the FDIC is running out of buyers. My friend states that often times they are literally coming down to the wire to get all the transactions and contracts, etc. pertaining to the purchase completed in time to seamlessly make the transition, as it is taking longer and longer to secure a buyer.
I'm not quite certain what to make of this other than it's quite obvious that we've reached a saturation point in the banking industry where they themselves can no longer purchase any more failed banks.
I believe that we should keep an eye out for more banks going into receivership or being absorbed by the Federal Government versus being purchased by other banks. We should also watch for any prolonged transitions of one bank closing and not opening back up under a new bank for more than a couple days. These subtle indicators may be one of those much sought after cues for knowing when to put some plans into action.
http://www.survivalblog.com/2010/09/letter_re_fdic_insider_in_illi.html
You may be right, you may be right. For one, if they where trying to get those people's money from the money markets to put it back into banks they are essentially destroying the MM's. Because it would break the buck and two if an MM halts redemtions, they couldn't get the money anyway until the fund allows them. So the only way would be for the MM's to fold up and go out of business and a few get shafted while the majority get into the banks. And two, I think the FDIC is trying to get people to put their money into the banks because then they will have more control over them and the money. When the MM's broke the buck back in 2008, money was flowing out of the US economy at such a rate Paulson said that if that if the US didn't stand behind and pass the TARP we would have been in a depression that afternoon.
http://www.youtube.com/watch?v=pD8viQ_DhS4
Since so many people and institutions around the planet are invested in those things they can't allow it to implode. But with your money in the banks, you will be under the FDIC and if that bank fails and they have to back your money they can take their time or parcel it out over a course of whatever they want. You see this way it keeps the problem inside the US and won't do damage to international trade. Everyone always say that the FDIC will pay, and they will but when is the key. You could be waiting for your 300,000 dollars or 5 million dollars for a few months or a few years. Or they could say well we will allow you 30,000 this year and pay you the rest next year if the economy is holding.
Your stuck, because THEY IN ESSENCE HAVE TO REPAY THE MONEY AND THERE'S NO WAY YOU CAN SAY NO I WANT IT NOW. Take it or leave it, nice ploy on the part of the FED. Getting your money and then protecting themselves from to much international trade damage.
Yes, I remember being in Argentina 6 mos after they devalued the Peso. I was shown banks with corrugated steel over all the windows. My friend said the people were a little upset.
It seems even if they had 100,000 Pesos in the bank, They could only take out 1000 a month.
I can see it now.
"You have $500,000 in the bank Mr. Jones, but looking at your records and your financial transactions, We have decided that with a car payment of $xxx and a mortage payment of $xxx dollars and the rest, we ran your numbers and you only really need to withdraw $yyy amount for your monthly expenses.
We all have to bear this burden comrade...
Your checking account will be credited with $1000 this month.
Actually, this is a scaling down of the previous rule that was enacted in 2008.
"The proposed rule emphasizes that starting Jan. 1, 2011, low-interest consumer checking accounts and Interest on Lawyer Trust Accounts (IOLTAs) — currently protected under the TAG Program — will no longer be eligible for an unlimited guarantee. "
FDIC was jealous that CDARS was charging higher rates for their service.
How Weimaresque!
Um. Can't make it to the election?
It's going to happen now, precisely according to plan, and precisely because of the upcoming election.
it just feels like the jackals and hyenas are nudging us sheeple to an edge of some sort, but i'm too deep in the thick of it to see the end-game (other than my $$/freedoms in their hands).
even with the ZH night-vision goggles, i'm still feeling pretty blind, but i suppose it's good to know 'it' is out there and after our asses. better than most people i sit in traffic with.
mikla's point about DDAs *not* being as secure as i'd been led to believe... scary. and it makes sense that with more DDAs sitting on their books, they can claim to have coverage of their capital requirements.
another gem above is the idea that there's another looming 'break the buck' out there, and they're clearing the way for some sort of stampede.
lastly, could this be related to filling in the gap that the foreclosure fraud technique was quietly cleaning up (resolving toxic crap on the sly) in the background?
clearly, i kno knot
they obviously believe in the Mayan Calendar...:-) Dont let the sheeple wake up before the 'kick' of 2012
They don't believe in it ... but they sure do want you to believe in it! ... so that they can use the date for a grand show of strength and 'salvation'. That is when I believe they plan to close the lid on the [by then] boiling frogs.
Yes. this may be a somewhat preempt to bank runs. Maintaining calm is an important part of a robbery.
Silver abnasralluqs!!!!!!!!!!!
So now the crooks have somewhere safe to place their loot...
Hey $250,000 ain't as much as it used to be.
(P.S. I heard that Ben-Tim just ordered a new Super-Press 5000 for Christmas
Actually, this is a scaling down of the previous rule that was enacted in 2008.
"The proposed rule emphasizes that starting Jan. 1, 2011, low-interest consumer checking accounts and Interest on Lawyer Trust Accounts (IOLTAs) — currently protected under the TAG Program — will no longer be eligible for an unlimited guarantee. "
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it just feels like the jackals and hyenas are nudging us sheeple to an edge of some sort, but i'm too deep in the thick of it to see the end-game (other than my $$/freedoms in their hands).
even with the ZH night-vision goggles, i'm still feeling pretty blind, but i suppose it's good to know 'it' is out there and after our asses. better than most people i sit in traffic with.
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