Safe or sorry?

By John Schooler

We may be experiencing the worst United States financial crisis in a generation. Last week, our country's GSEs (Government-Sponsored Entities) Fannie Mae and Freddie Mac needed government assurances that it will stand behind them in order to calm investor's fears.

A bill just passed in the House of Representatives giving Treasury Secretary Henry Paulson power to inject capital into Fannie Mae and Freddie Mac. The seizure of California-based IndyMac Bank by federal regulators increased the worries that the troubles could spread to commercial banks and ordinary depositors. So what would happen to regular banks?

Are depositors safe from a possible meltdown of the financial institutions? How can regular depositors protect themselves when their assets are in a savings account, money market account or a regular CD? And what about other financial institutions like securities firms? How should we process all this information and what actions can we take?

The first response to these questions is that deposits in commercial banks are considered safe since they are insured by a federal insurance if the bank fails. The FDIC as it is called, stands for the Federal Deposit Insurance Corporation and it preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks for at least $100,000. As an independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the beginning of FDIC on January 1, 1934, no depositor has lost a single penny of "insured" funds as a result of a bank failure.

Savings, checking and other deposit accounts such as CDs and money market accounts are generally insured to $100,000 per depositor in each bank the FDIC insures. A money market account is a savings account that offers the competitive rate of interest in exchange for larger than normal deposits. These accounts are also known by the acronym MMDA, which stands for money market demand account or money market deposit account. Many money market accounts place restrictions on the amount of transactions you can make in a month such as five or less. Furthermore, you usually have to maintain a certain balance in the account to receive the higher rate of interest. Some banks require at least $500; others require a much higher balance.

Deposits held in different categories of ownership and without the protection of a trust, such as single or joint accounts, may be separately insured. Depositors, without a trust, can mitigate risk if they have more than $100,000, by having different account holders on the title, as each of this would be separately insured. Lets take an example: If a husband and wife have $300,000 in a bank they could title the accounts as: John Doe and deposit $100,000. Jane Doe and deposit $100,000, John Doe and Jane Doe JTWROS and deposit the remainder $100,000. Depositors with a large amount of money under a trust can stay protected by diversifying their deposits among different bank institutions instead of taking some of their money out of the trust.

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