All Forum Posts by: Kevin Yeats

If you were the president of a reasonably small, profitable, financially stable bank with boatloads of capital at the time when, just for the sake of this argument, the FDIC disappeared.

All of a sudden, your bank, the same as every other bank, no longer has insurance protecting its depositors. Your depositors, along with depositors at other banks withdraw their funds as quickly as possible ...

... and put them where?

As the bank president, how do you respond?

Do you offer higher rates?

Do you post the bank's balance sheet on the front door and the website?

Do you personally call the largest depositors and assure them of the safety of their funds regardless of the insurance status?

Do you offer these same depositors the chance to convert their large deposits to other debt instruments of the bank?

How do you weather the storm?

How do the depositors react? If they withdraw the funds, do they do so in cash? Do they transfer the funds to Vanguard or Fidelity into a Money Market Account (with no insurance)? What about transaction accounts (esp payroll accounts that need to have funds in them at least every 2 weeks?)

Yes, it is now incredibly easy to transfer funds into and out of a bank, between banks etc.

Just because the bank no longer has FDIC insurance, does that mean that the next best alternative for a depositor is the mattress?

Duplicate

This is the full passage that I questioned.

Remember the FDIC was created during the Great Depression and there were banks around before there was deposit insurance.

@Bryan

Why?

I pose this question to have a better understanding of your reasoning behind the rapid deposit withdrawls.

First, this topic is waaaaaaaaay too complex to adequately discuss here. Many academicians have extensively studied and authored articles discussing the workings and failings of the US deposit insurance system. Look up some of these studies.

Second, in this decade 338 banks have failed including some sizeable ones. This is not even a record decade for bank failures under the FDIC.

Total losses by insured depositors $0 - zero, nothing, the big goose egg.

Bank Shareholders lost money in bank failures. Debtholders lost money too. Some uninsured depositors lost some money.

By the way, in recent decades the deposit insurance limit was $40,000. I believe the limit was raised to $100,000 in the late 70s or early 80s.

If I read between the lines correctly, the OP's issue is the mismanagement at the FDIC. I would characterize this a misdirected mission (as set in law).

I concur and again direct you to the above mentioned academics and their studies especially their recommendations for reform.

If you are worried about losing money placed on deposits at banks, you can always hold cash.

Fundamentally, the "value" of a share of stock is the net present value of its future cash flows. Cash flows increase with rising earnings and thus the value of the share of stock also increases. Interest rates serve as a measure of "alternative investments" (alternative uses of capital) and thus have an inverse relationship with the value of the stock.

I used the term "value" rather than "price" because lots of factors cause the "value" of a share of stock to diverge from its "price". Speculation being one of these factors.

To address the OP's thesis, who does not know that there are lots of baby boomers recently retired or soon will be retired? Do you think that this effect is not fully priced into general stock prices? That prices are lower today because current shareholders feel that no or a reduced market will exist for the shares the current owners want to sell?

Food for thought.

I have a lender who offers 85% LTV and will accept up to 7.5% LTV seller second loan on MF. But these loans are generally for good, creditworthy borrowers with MF experience.

Let me know if I can help. The worst this lender can say is "no" and if you don't ask, then the answer is "no."

@Bryan

Find someone in his/her late 70s or 80s who started a family in his/her early 20s. He/she might have purchased a house and bought $50,000 worth of life insurance coverage because of the mortgage debt.

Today, year 2010 after 10 years of subpar stock market performance (if he/she even has any stocks - financial textbooks say to lighten up on stocks in the older years) and current interest rates at 1-2% yielding not enough to live on without touching principle. Now one spouse gets sick and needs some care not covered by Medicare (there are LARGE loopholes), The couple MUST tap more retirement savings and/or house equity. Then the ill spouse dies leaving a lot of bills for the survivor to handle while dealing with grief (loss of a lifetime companion).

Permanent Life Insurance would have been a big help.

Even when the above situation does not happen, it is rare for people to have enough money especially if they were a worker instead of a business owner.

My $0.02

First, I'll limit my discussion on this topic. This thread nor this website are not the best forums for involved discussions of insurance topics.

@Bryan

I'm not a fan of people using term insurance, a product with a limited life by design to solve a permanent problem. It would be like taking a trip from New York to Los Angeles in a car that would take one only to Kansas City.

The real question is what life insurance needs ... what would happen - financially - to a family if one member dies at each stage of life? IMHO it is rare for a person's needs to completely disappear at any point in his/her life. Many things can happen after the kids are grown and the house is paid off. Often these days, the kids return to the nest, the parents decide on a different home or -- a biggie -- medical expenses during the senior years especially nonmedical care at home or in a nursing home (@ $5,000 to $10,000 per month).

Even without the above expenses, what about pension plans or social security? Most pension plans offer the pensioner one amount per month for the rest of his/her life but a lesser amount per month if the pensioner chooses the joint lives of himself/herself and spouse. SS survivor benefits are also lower.

My "understood or not" comment refers to the many people who refuse to realize the risks later in life with a "that is not going to happen to me" attitude.

Talk to the spouse or other close family member of someone who has spent a year in a nursing home.

@Charles

Historically the return inside a Whole Life policy is extremely poor. These days with near zero interest rate on bank savings, some of the older policies (Whole life or universal life) offered guaranteed minimums of 2% or 3%.

But you are very correct that taking a long-term view of one's financial life with due consideration to the risks - even risks we cannot foresee is the best way to plan ahead. Talking to a qualified, unbiased third party is a good step and worth the money.

I've met a number of people who had loved ones for whom "their wills matured. One woman, a nurse, was widowed by her husband. She had 2 kids to raise and since her hubby had a $1 million life insurance, she could afford not working and spending the time raising her kids. When I met her, her two kids were in HS and she was almost through all of the $1 million. She was taking courses to update her now *dated* nursing skills to rejoin the work force.

Amount and type of insurance are never easy answers.

Too many people use a temporary solution (term) for permanent problems.