Urgent Steps to Protect Your Savings from Bank Failures
Personal_Finance / Credit Crisis 2008 Jul 29, 2008 - 12:37 PM GMT
Sharon A. Daniels writes: The ongoing credit-crunch continues to shake-up financial markets in unexpected and frightening ways. It's hard to keep up with the fast-growing list of financial sector casualties. Just take a look at the fallout so far this year ...
Bear Stearns : This, century-old, brokerage firm was on the verge of collapse in March when the Federal Reserve arranged a last-minute fire sale to JP Morgan to prevent bankruptcy.
IndyMac Bank : One of America's largest mortgage lenders DID collapse just weeks ago, stranding some 10,000 depositors WITHOUT FDIC coverage. This could prove to be the most expensive bank failure in U.S. history costing taxpayers between $4 and $8 billion! 1
Fannie Mae and Freddie Mac : Fannie and Freddie are Government Sponsored Enterprises, so you'd think they'd be run conservatively, right? Wrong! Fannie Mae is fighting to stay in business on life-support from the U.S. Treasury. Meanwhile, Freddie Mac is already insolvent under fair value accounting rules! 2
Landmines are going off left and right in the financial sector, leaving unprepared investors in one of the most precarious situations since at least the last bear market and perhaps since the Great Depression.
In this devastating climate you should understand that it's not the return ON your money you should be concerned about ... it's the return OF your money that's most important.
If you have money with an ailing Wall Street investment bank, or a shaky commercial bank, then it is high-time you ask some tough questions about the security of your keep-safe money. Questions like: "What's really in your money market fund?" And, "Just how safe is my money in this bank CD? Will I be fully covered if it fails?"
If the answers to any of these questions are: "I'm not really sure," then you should take immediate steps to help safe-guard your wealth.
Don't assume that your bank CD or money market fund is safe just because it has been in the past. Bear Stearns was safe for nearly 100 years; Fannie Mae and IndyMac were considered safe too ... until now. Things are seriously different today.
The ongoing credit-crunch is taking a heavy toll on financial institutions once considered too big to fail ... let's take a more detailed look at the casualties so far, and talk about a few simple steps you can take right now to make certain your keep-safe money is really secure.
Expect More Bank Failures as Loan Losses Double
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| Depositors line-up outside an IndyMac branch worried about the return of their money ... |
The high-profile failures listed above may be just the tip of the iceberg — the first of many financial firms to go bust — sending severe after-shocks through financial markets.
In fact, the Federal Deposit Insurance Corporation (FDIC) says 90 lending institutions are on its "problem list" of banks that could fail.
Could your bank be on the list? Of course, the FDIC won't reveal these names, for fear of triggering panic. However, the Chairman of the FDIC is on record warning of "additional bank failures as lenders grapple with losses from the collapse of the U.S. housing market." 3
How Much Worse Could the Current Banking-Crisis Get?
Some historical perspective might help answer that question.
The U.S. Savings and Loan Crisis of the 1980s and early 1990s gives us perhaps the best example to go by. The S&L Crisis has been labeled as "the greatest collapse of U.S. financial institutions since the 1930s." 4
From 1986 to 1995, more than 1,000 savings and loans with $519 billion in combined assets failed and were either closed or reorganized by Federal regulators. The S&L debacle resulted in a loss of about $153 billion when all was said and done, which overwhelmed the FSLIC deposit insurance funds available at that time.
Ultimately, U.S. taxpayers footed the bill for 81% of S&L cleanup costs — nearly $124 billion! The number of federally insured thrift institutions in the U.S. was cut-in-half during this period alone! 5
Fast-forward to the present. We are now faced with a new financial and banking sector crisis that will almost certainly eclipse the S&L debacle by orders of magnitude. Over the weekend, U.S. banking regulators closed two more banks due to insufficient capital. So far, only seven banks, including IndyMac, have failed this year, but there will be many more to come — you can practically count on it.
The FDIC has its list of 90 "problem" banks, but isn't about to alert the depositors in these institutions for fear of triggering a run on these banks. But, what if there are many more insolvent lenders flying under the radar? After all, IndyMac wasn't even on the list ! 6 One banking analyst warns in a recent report that as many as 150 banks could fail over the next 12 to 18 months — "Everybody is drawing up lists, trying to figure out who the next bank is." 7
The truth is, bank failures are a lagging indicator. You may not even realize your bank is in trouble until — as in the case of IndyMac — there's a desperate run-on-the-bank. But by the time panicked depositors line up outside your local branch, it's already too late.
American Banks Have $2.6 Trillion in UNINSURED Deposits ...
Is Your Bank Account Fully Protected?
Consider this: global banks and brokers have so far suffered losses or asset write-offs of more than $400 billion — and still counting. 8 These staggering losses already amount to almost three-times the size of the entire S&L debacle!
Meredith Whitney, an Oppenheimer & Co. securities analyst, recently said that banks are just halfway through writing off the value of assets . 9 She predicts U.S. banks will report the biggest losses in more than two decades, exceeding the last banking-bust in 1990 by "a significant margin." 10
How You Can Help Protect Your Keep-Safe Money in this Credit-Crunch Environment
Here are four pro-active steps you can take right away to help safeguard your wealth ...
First: Don't Overreach for Yield . Remember, in a true credit-crisis like this, for your absolute "keep-safe" dollars, it's the return OF your money that's most important, not the return ON your money. Unrealistically high yields may actually be a sign of trouble meant to entice your deposits into a shaky institution.
It's better to be safe, than sorry. Even if this means accepting a lower yield to protect and access your money — whenever you need it.
Second: Watch for Red Flags . Just a week before it collapsed, IndyMac Bank was offering interest rates of 4.35% on one-year- CDs. That's way out of line with the national average CD rate of just 3%. 11 Banks that are desperate to attract new deposits may offer these unusually high teaser-rates — but don't bite. It could be a warning flag that something isn't right.
Remember, if it sounds too good to be true ... it probably is!
Third: Know Your Limits . FDIC deposit insurance is limited to just $100,000 per depositor , per insured bank (always read the fine print! ) — or up to $250,000 per owner for certain retirement accounts. 12 A surprising number of depositors exceed these limits. In the case of IndyMac, about 10,000 people with a total of nearly $1 billion in deposits WERE NOT protected by deposit insurance when the bank went belly-up — these folks may get only 50-cents back on each dollar they deposited . Make sure your FDIC-insured accounts are sized within the limitations and titled correctly. You can read more about deposit coverage by visiting the FDIC website .
FDIC data indicates that as much as $2.6 trillion in deposits are UNINSURED nationwide! 13 If you are one of these depositors, you must take action now.
Fourth: Know What You're Getting Into: Bank CDs are, of course, insured by the FDIC, but ONLY up to the limits prescribed by law ( see above ). But in a low interest rate environment, many investors switch to money market mutual funds in search of fractionally higher yields. Remember, money market funds DO NOT carry deposit insurance, and these funds have no legal obligation to insure you don't lose money. 14
Money market funds can load up on short-term debt instruments of questionable quality, rather than sticking with virtually risk-free government securities. In fact, lurking inside many money markets you'll find short-term corporate debt — like commercial paper, and worse- collateralized debt obligations (CDOs) — some of the same debt that is behind the bursting of the credit bubble.
Since the credit-crunch began nearly a year ago, money market fund managers and investors found out the hard way that commercial paper, CDOs, and other toxic-paper is no place for your keep-safe money.
Several money market funds managed by Bank of America, Credit Suisse and Wachovia, among others — suffered over $700 million in losses from investing in "junk paper" — short-term debt issued by Wall Street — which may carry substantially more risk than government securities. 15
To keep your money out of harm's-way — you should avoid these higher-risk money market funds at all costs.
My view: This is NO time to be reaching for unrealistically high yields by investing in securities of questionable quality. And, with more bank failures likely, many are thinking-twice about their FDIC coverage. Fortunately, there are alternatives.
Also, Give Serious Consideration to Alternative Investment Options
With more bank failures possible, in my opinion, one of the most secure ways to invest your keep-safe money is in United States Treasury securities, which are a direct obligation — and backed by the full-faith and credit — of the U.S. Government. There is NO LIMIT on the Government's back up of its obligations — regardless of how much you have invested.
U.S. Treasuries are considered a virtually risk-free investment, especially in times of credit market panic. Indeed, most financial industry experts, with the exception perhaps of bankers who are trying to attract deposits, would agree that direct guarantees of the U.S. Treasury are actually stronger than the guarantee of the Federal Deposit Insurance Corporation. Being backed by the full faith and credit of the U.S. Government has no limit, as does the FDIC.
The reason is pretty obvious: over a thousand bank and S&L failures over the last 30 years have caused inconvenience, disruptions and in some cases, outright losses for individuals and businesses. In contrast, there has never been a default on U.S. Treasury securities ... even when fiscal budget disputes have temporarily shut down government operations.
Besides, it is the U.S. Government that ultimately backs the FDIC. So why not go directly to the source — investing in government-backed U.S. Treasury securities. In my view, investing in Treasuries is a great alternative to CDs and money market funds.
All things considered, U.S. Treasury securities offer investors one of the best safe-haven investments in uncertain times. That's why nearly 18 years ago, Weiss Capital Management, a Registered Investment Adviser, launched a special strategy that invests primarily in these securities.
The Weiss Managed Treasury Program is one conservative investment option that's worth serious consideration. This professionally managed investment program aims to preserve your capital while seeking higher levels of current income than you'll find in most money market funds or bank CDs.
Today's headlines remind us that, even with investments once considered "ultra-safe" it is still possible to lose money, and this is also true for the Weiss Managed Treasury Program, as with any other investment.
However, the Weiss Managed Treasury Program is specifically designed to reduce your risk by featuring a conservative strategy that invests in U. S. Treasury securities, and a money market fund ( the Weiss Treasury Only Money Market Fund 16 ) that also invests mainly in U.S. Treasuries.
If you're looking for a higher level of current income than some money market funds or bank CDs provide, not to mention the safety and security inherent in U.S. Government obligations, then you may want to take a closer look at the Weiss Managed Treasury Program.
I consider U.S. Treasuries one of the highest-quality investments in troubled times, and that's the central focus of this managed strategy. If you have been searching for a solution that offers you an extra layer of professional investment guidance in today's credit-market chaos — send for your Weiss Managed Treasury Kit today by calling 800.814.3034 . Or to get started right away, click here .
Sincerely,
Sharon A. Daniels, President
Weiss Capital Management, Inc.
An affiliate of Weiss Research, Inc.
1 Wall Street Journal; "Bank Fears Spread After Seizure of IndyMac," 7/14/08
2 Bloomberg: Ackman Shorts Fannie, Freddie, Suggests Restructuring, 7/15/08
3 Bloomberg: FDIC Chief Bair Assures U.S. Bank Consumers Deposits Are Safe, 7/8/08
4 FDIC: Banking Review, Fall 2000, Vol. 13, No. 2; "The Cost of the Savings and Loan Crisis: Truth and Consequences"
5 Ibid
6 CNN.com; "IndyMac to reopen 'strong and safe,' new boss says," 7/13/08
7 International Herald Tribune; "Analysts say more U.S. banks will fail," 7/14/08
8 Bloomberg: "Bank Writedowns Half Over, Dividends Must Be Cut, Whitney Says", 7/16/08
9 Ibid
10 Bloomberg: "US Banks Face Most Losses in 20 Years, Whitney Says", 4/16/08
11 Bankrate.com: national average interest rate on 6-month CD as of 7/24/08
12 www.fdic.gov , FDIC When a Bank Fails — Facts for Depositors, Creditors, and Borrowers, 7/24/08
13 Wall Street Journal; "Bank Fears Spread After Seizure of IndyMac," 7/14/08
14 New York Times; "Investor Safe Haven Becomes a Concern", 11/14/07
15 Ibid
16 The Weiss Treasury Only Money Market Fund is offered and sold to persons residing in the United States and is offered by prospectus only. Please read the prospectus carefully before you invest or send money as it contains a complete description of the Fund's investment objective, as well as all charges, expenses and an assessment of risk, all of which should be considered carefully before investing. To obtain a prospectus, as well as new-account forms, please contact Shareholder Services at The Weiss Fund, Inc., at 800.430.9617 or www.WeissFund.com . Weiss Capital Management, or its affiliates, provide advisory, administrative, distribution and other services, and receive compensation.
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