Monday, July 14, 2008
Update: Major Bank Failure
FDIC Changes Rules To Prepare For "Major Bank Failure"

Sixty Five Institutions, Not Named, In Danger; Wachovia, Bank of America, Citigroup, JP Morgan Chase, HSBC Said To Be In Trouble

Washington, DC -- The Federal Deposit Insurance Corporation has been seeking public comment since April on rule changes that would allow it to accomodate the failure of a major international bank without, in turn, bankrupting itself.
Among the rule changes is a proposal that would allow the FDIC to pay people only 10% of the money they had on deposit, in say, a checking or savings account, regardless of whether the account had more or less than $100,000 in it.

In the recent failure of IndyMac bank, the FDIC stated that all insured depositors would be paid and that all uninsured depositors would be paid 50 cents on the dollar; in two other recent small bank failures this year, depositors received 70 cents and 6 cents on the dollar for uninsured deposits.

However, under the new rules, if a major bank, with Bank of America, Wachovia, JP Morgan Chase, Citigroup, and HSBC being named possibilities, were to fail, depositors, insured or uninsured, may receive as little as ten cents on the dollar for the money in their checking and savings accounts.

As IndyMac bank failed Friday, hundreds of thousands of people found themselves unable to pay rent, buy food, or meet the basic necessities of life, as their bank accounts were frozen by the FDIC. The FDIC stated today it would reopen bank accounts and give people access to their money up to $100,000 on Friday.

But if a bank the size of Wachovia or HSBC were to fail, the FDIC would, literally, not have enough money to pay all the checks all of their customers would write on their accounts. In that case, it has asked for the adoption of provisional rules that would freeze 90% of those bank's deposits.

When a person deposits money in a bank, the bank then takes the money and either spends it or loans it out to someone else, keeping only a small margin of cash on hand, usually somewhere between six and ten percent. If all the depositors demand their money back immediately, the bank generally cannot pay all the money out, and can fail.

The FDIC was set up to prevent bank failures by insuring deposits and preventing runs on banks, but the bankruptcy of the US government is such that it is questionable whether the FDIC can cover the deposits of a major bank without the government literally printing money for the FDIC to distribute.

In a recent report, the FDIC stated there were 65 "problem banks" currently operating in the United States, but refused to name them, citing the danger of a run that would topple those banks over.

In conjunction with the report, a banking industry analytical group, Institutional Risk Analytics stated five large US and international banks -- Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., Wachovia Corp. and HSBC Holdings PLC -- were likely on that problem list, due to bad investments in the mortgage market.

It appears that about 95% of the $19 billion in deposits in the bank are insured, but that leaves $1 billion that was not covered by FDIC guarantees. According to the agency, 10,000 IndyMac customers could lose as much as half of that amount, or $500 million. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.

"This will certainly be a costly failure. Whether it's the costliest, we just don't know at this point," FDIC Chairman Sheila Bair said on a conference call late Friday night. The failure could also affect premiums paid by all banks for deposit insurance, she added.

Source: Black News
Source: Guardian

Video: http://www.youtube.com/watch?v=lkyywGrFpjM

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