Chicago, IL
By A.B. Dada
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With IndyMac’s not unforeseen bankruptcy and temporary closing of its doors and ATM machines, there’s been a little fear by not just depositors for where their money is, and if they’ll get it back. There’s a larger question that the old media has so far ignored: what about payrolls?

FDIC insurance covers $100,000 per account, more if there are multiple owners on an account or if there are beneficiaries. That number could easily be surpassed by corporate payroll accounts. If an average worker gets paid a gross amount of $4400 per month, or $1100 per week, just 91 employees are needed for that account to breach the $100,000 insured mark. Do any employers with more than 91 average-wage employees bank at IndyMac? If so, those employees could be in for a surprise.

The FDIC offers something called pass-through insurance: if an account has moneys deposited that are owned by more than one individual, the insurance is raised to cover $100,000 per individual. The problem with this situation is that payroll accounts are NOT considered pass-through worthy accounts: the employees do not have a right to the money in the account. Insurance is set at $100,000 unless there are multiple owners on the account.

One area that might be covered by FDIC insurance per employee is the program that allows employees to be paid via a debit/ATM card, or a payroll card. In such a case, the employer puts money into an account, and each employee is given an ATM card to access their payroll check, allowing them to withdraw up to the amount they’re being paid. The FDIC has “sort of” clarified that these accounts are insured up to $100,000 per employee. This is still a bit up in the air, though, and hopefully the IndyMac situation will give more clarity to what happens in these situations.

Whatever the case is, it is clear that your money is not safe, in any bank, without proper reserves to back up situations where people are demanding more of their money than usual. Expect to see more banks fail, even solvent ones, if they do not have the liquidity to produce cash on demand.

Chicago, IL
By A.B. Dada
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It’s a common search term for this site: what banks are bankrupt?

Theoretically, there’s only one way to figure out how solvent a bank is: compare the amounts of money/deposits owed to depositors (people with accounts) versus the amount of cash the bank has on its balance sheets and the amount of assets the bank has as security against loans. The major problem today is that many banks are listing houses on their asset sheets that are far overvalued due to the recent, and expected, housing market crash.

If a bank owes depositors $10 billion, and it has $1 billion in cash in reserves and $9 billion in assets (businesses, houses, cars, etc), it is basically at a break even point. Here’s the issue: if all the depositors wanted their money, the bank would only have 1/10th of the money necessary to pay people back. If they had to sell the assets, a firesale would likely push the value of the assets down significantly, in some cases 50% or more.

We just saw IndyMac fail because their balance sheets bordered on fraudulent. People wanted their money, and IndyMac knew they couldn’t sell their assets or loans off. Whoever buys IndyMac will pay well below its true market value, though, and will end up with a profitable sell-off if they can sell the assets before the asset market tanks further.

Other banks with obvious problems are all the big boys: WaMu, Chase, BofA, Citibank. Of course they were over-leveraged (have HUGE ridiculously overpriced balance sheets versus what they owe depositors and investors). They’re also hard up for cash as depositors are less likely to give the banks money when the return is lower than the cost of inflation. And there’s the rub: because the banks had spent decades borrowing from the Fed or each other, they were not really interested in paying decent interest returns to depositors. A true wealthy nation has depositors who receive reasonable returns for their deposit, and loan rates which are realistic (not 6% but 10% or 18%). Low interest rates cause morons to borrow money, and give banks reason to lend to morons. No offense to the morons reading this site.

So now we have to consider which banks are bankrupt, which are insolvent?

The first task to perform is to separate the insolvent banks from the illiquid banks. Insolvent banks have lower asset+reserves value than their deposits. They are effectively bankrupt. Illiquid banks have enough asset+reserves value that if they had to sell assets, they could handle paying out depositors by borrowing from the Fed or other banks.

So who has enough asset+reserves value? Likely none of the national banks, which made money hand-over-fist during the housing boom, only to pay out those profits as bonuses to the top tier employees, managers and CxOs. That money is gone, my friends. If you’re a depositor, expect failure. Oh, you’ll get your FDIC insured money back, but by the time the banks are bailed out, if they are, your money will be worth quite a bit less than before. $100,000 insurance means nothing if the Fed has to print in doubletime, effectively allowing you to buy only $50,000 of goods with that $100,000. Ahh, the magic of monetary inflation.

If you really want to dig deeper into why almost ALL banks are insolvent, I welcome you to visit my website dedicated to Full Reserve Banking at www.fullreservebanking.com.