bailouts

Could Your Business Fail If Your Bank Fails?

Kate Lister — Fri, 17 Dec 2010 23:11:51 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/could-your-business-fail-...

That bad news: So far in 2010, 149 banks have failed, more than the 140 that went out of business in 2009. In fact, more banks have failed this year than in any year since the S&L crisis of the '80s and '90s when a total of 747 failed.

The good news: The banks that are failing this year represent only about half the assets of those than failed in 2009, and a third of the assets of those that failed in 2008.

What If the Bank That Fails Is Your Bank?

The Federal Deposit Insurance Corporation (FDIC) insures bank deposits (principal and interest) in member banks. According to their website, "FDIC insurance is backed by the full faith and credit of the United States government. Since the FDIC's creation in 1933, no depositor has ever lost even one penny of FDIC-insured funds."

Keep in mind that your money is insured only if it's in an institution that's actually a member of the FDIC. It's not hard to find a bank online that offers attractive interest rates (anything over 1% these days) and claims to be FDIC insured, but it's not. It's not a bank, and it's not insured.

If you're not sure if your bank is insured, visit the FDIC Bank Find website and check.

And to be clear, the FDIC doesn't insure all your money. FDIC insurance covers checking, NOW, savings accounts, money market deposit accounts, and certificates of deposit (CDs) up to the insurance limit. Even if you purchase from an insured bank or savings association, the FDIC doesn't insure your investments in "stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities," according to their site.

How Much Personal Money Is Protected?

The FDIC will insure up to $250,000 per depositor per ownership category, meaning single owner, joint, trust, and retirement accounts.

A single account is insured for $250,000, and a joint account with your spouse, since there are two depositors, would be insured for $500,000. If you were brave enough to add two kids to the joint account it would be covered up to $1 million because the account has four depositors.

If you also have a revocable trust account, that's covered up to $250,000, and certain retirement accounts — such as IRAs and Keogh accounts — would be covered up to another $250,000 too.

So, in this example, you'd be covered up to $1,250,000 if your bank failed ($1,750,000 if you included the kids).

How Much Business Money Is Protected?

Let's say you run an online business with a shopping cart that accepts credit cards, and you've set up a bank account where your merchant processor deposits customer payments. And let's say you also have a personal checking account set up in your name only.

If your business is a sole proprietorship (it's not incorporated or a partnership), that account is insured as if it was part of your single account — the two accounts together are insured for $250,000.

If your business is a corporation or partnership, the funds they deposit are insured up to a maximum of $250,000. Unlike a sole proprietorship, however, they are insured separately from your personal accounts or any stockholders or partners.

But keep in mind that even if you have separate accounts designated for different purposes, they are not separately insured — they're added together and insured up to $250,000.

What If I Want To Deposit More Than $250,000?

The simple solution, if you want to make sure your deposits are insured for more than $250,000, is to put the money in different institutions. Note that making deposits to different branches of the same institution doesn't increase your protection.

What Could Possibly Go Wrong?

The fact is, banks still fail. The FDIC doesn't send a warning that your bank is going under, and only stupid senators (very publicly) release letters to regulators urging that they take action to prevent a bank's collapse (IndyMac in this unusual case). The way you find out is when your debit card is denied or you discover your bank has a new name.

If that happens, you might wonder what's the FDIC insurance claims process? Do you get paid right away? Do you have to wait, and for how long? How do you prove how much you had in your account? What will happen?

The FDIC is accurate in claiming that no one has lost a penny of insured funds. In fact, when the worst has happened, they've been known to step in and return a portion of uninsured funds.

But what typically happens if you have more than $250,000 in an account and your bank fails? You become a creditor, just another person in line to get whatever money the FDIC can recover by selling the bank's remaining assets such as desks and file cabinets.

How Long Will My Money Be Tied Up?

Within a few days, you'll be doing business with a new bank and your insured funds will be available.

When the FDIC determines a bank needs to be shut down, they obtain bids from other banks and the failed bank becomes part of another entity. New bank personnel and FDIC people will move into your old bank's offices. They typically use a weekend to re-organize the books and re-open the failed bank as a branch of the new bank by Monday morning. Presto-chango, all customers of the failed bank became customers of the succeeding bank.

If you have balances over the FDIC limit, you become a creditor of the failed bank. The FDIC will sell off the failed bank’s assets and, if they have the money, pay you from the proceeds. That process can take years.

Could Your Business Fail If Your Bank Fails?

If you have deposits well in excess of the FDIC limit, and your bank can't be sold to another institution, you could lose enough to go under with the bank. But if you pay attention to where you put your money, you will be protected.

This article is from Kate Lister of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

When will the bailouts stop? A summary of 2008 stimulus packages and bailouts in the United States

Xin Lu — Mon, 20 Oct 2008 21:48:36 +0000

2008 will probably go down in history as the year of bailouts, crashes, and meltdowns. Here is a quick run down of all the laws and bills congress pushed through with lightning speed in this election year. With two months left in the year, we may see some more bailouts and stimulus packages to come.

02/13/2008 - $168 billion stimulus package is passed into law . This included tax rebate checks for individuals making less than $75000, and married couples making less than $150000. The most overlooked part of this package was that the jumbo loan limit was raised for mortgages that are purchased by Fannie Mae and Freddie Mac. This means that just eight months ago the government was still a cheerleader behind more debt and more spending.

03/26/2008 - The Federal Reserve extends a $29 billion "loan" to J.P. Morgan Chase to purchase the failed Bear Stearns through a shell company. BusinessWeek has a good article on how this deal worked. Essentially, the Fed purchased $29 billion in mortgage backed securites that could lose value.

07/26/2008 - $300 billion "housing rescue" bill was passed. This is the bill that established the Hope for Homeowners program, and also gave Treasury Secretary Paulson the ability to give Fannie Mae and Freddie Mac a limitless line of credit. The Hope for Homeowners program has now started and offers those who cannot afford their mortgages a chance to refinance into smaller mortgages insured by the Federal Housing Administration. This made Paul wonder if we should all just stop paying our mortgages .

9/7/2008 - Fannie Mae and Freddie Mac were taken over by the Federal Housing Finance Agency and the Treasury promised up to $100 billion in future support and capital investments per company . The actual total costs are yet to be determined.

9/17/2008 - AIG mostly purchased by the United States government for $85 billion dollars. The United States now owns 79.9% of the insurer through a loan deal.

10/03/2008 - $700 billion pork ladened package gets signed into law. The Treasury has been given the right to buy troubled assets and hold them. Also, $250 billion are used to purchase stocks in thousands of banks. Additionally, a variety of random provisions such as exemption of taxes on toy wooden arrows were included.

Now - The White House and Congress is now mulling over a second stimulus package of the year. This package is planned to be anywhere from $150 billion to $300 billion. Noone knows the details, yet. Additionally, there is a $25 billion auto industry bailout that is waiting to be signed into law. I guess $25 billion is really peanuts compared to what has already been passed.

Where will all of this money come from? Some say that not all of these deals will be expenditures because the equity stakes the government is taking in the largest banks and AIG will eventually give a return to the taxpayers. However, noone seems to be quite sure if that would really happen. Meanwhile, the reach of United States government has certainly grown with all of these acquisitions. When you add it all up, the quick financial maneuvers taken by the United States Government is costing more than the war in Iraq.

Another comment on the whole fiasco is that the National Debt Clock has run out of digits and each family's share is $86,023. No matter who the next president is, he must work on reducing the ever rising national debt . In fiscal year 2008 the United States spent over $450 billion in debt interest payments , and if the government does not chip away at its debt principal then more and more of this nation's production will be going towards debt service. Something has to be done, but one government bailout or stimulus after another is not the answer.

Finally, the scariest thing about these bailouts is not just the amount of money they will cost American taxpayers for generations to come, but that these bills were passed with haste and little concern for the voice of the people. In this video, Senator Diane Feinstein states that she received 91,000 phonecalls of which 85,000 were against the $700 billion bailout, but that she believes that these angry citizens do not understand the good the bailout will do. Is a democratic government really democratic if most of the elected officials do not serve the people that voted for them?

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: