Trouble ahead for the Obama Administration: FDIC RIP

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Trouble ahead for the Obama Administration: FDIC RIP

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We've sure heard alot about change.  Peer hard into the dark slot of a piggy bank and you will see it.  Protected by the pig, this is the change you've been saving up for months.  Now, remove the bottom cork and shake hard and it is now loose change falling to the floor, rolling away and lost.  A good way to protect pennies is to put them in the bank, a wise investment, right? 

A kid's piggybank can break, but what about the bank at the corner of Main?  That's not so cute anymore.   That's where the FDIC came in handy. 

In 1933, less than one year after taking office, President Franklin Delano Roosevelt signed the Federal Deposit Insurance Act (FDIC).   The purpose of the FDIC was quite simple: it was designed to provide deposit insurance which guarantees the safety of deposits in member banks.  You put your paycheck in the bank and the FDIC insures that you will be able to take the money out.

The FDIC assured us as it protected our copper penny coffers.  But, not for much longer with the Obama administration.  Many who voted for this change, those wide-eyed childlike innocent voters, believed in someone who would just do something.  It didn't matter what.  And, to that end they are not yet dissapointed. Yet.

In 2009, less than one month after taking office, President Barack Obama has signed into law the Public-Private Investment Fund. This law requires the FDIC to guarantee up to $600 Billion over and above its original responsibility of insuring the deposits of the American People.  This new obligation, coupled with the Temporary Liquidity Guarantee Program (TLGP) enacted days before the 2008 Presidential Election has put the FDIC and those who rely on it in a vulnerable position. 

What financial resources the FDIC had available to fulfill its original mission have quickly fallen through the cracks like a child's pennies from a broken pig.  During the period from 2007 to the present, the FDIC’s reserves have diminished from $52.4 Billion to only $19 Billion.  President Obama will shortly sign legislation to allow the FDIC to borrow up to $100 Billion (ostensibly to relieve some of the new pressures bearing down on it), but that amount will cover less than 15% of the FDIC’s future liability in the age of Obama.
 
This might be considered business as usual in Washington, D.C. if the FDIC had the ability to print money like the Federal Reserve.
 
The problem is, it doesn’t have this ability – no matter how much the federal government wants to pretend that it does.  

In 1982 Congress passed the Competitive Equality Banking Act (CEBA) through which it intimated that the FDIC's resources were backed by the full faith and credit of the United States of America; but this "fact" isn't true.  The FDIC is on its own.  If this sounds difficult to believe, just ask the FDIC’s lawyers.  In 1987, the FDIC's legal counsel Alan J. Kaplan issued a legal opinion on this vulnerability and stated the following:
 
      “While any final conclusion on this matter rests with the Attorney General of the United States and ultimately with   the courts, it is our opinion that Title IX of CEBA merely represents an expression of the intent of Congress to  support the FDIC's deposit insurance fund should the need arise.  Title IX does not change any existing underlying   law.  It does not amend the Federal Deposit Insurance Act, nor does it or any other provision of CEBA alter the method  by which the FDIC is funded.  The FDIC continues to receive no government appropriations, and its funding continues to  consist entirely of its income obtained from insurance assessments and from the return on investments made in  government securities.” (emphasis added)
 
Congress, consistent with its Alice in Wonderland nature, later passed a law that requires the FDIC to state officially that it is “backed by the full faith and credit of the United States” even though apparently it is not.
 
Until the present financial upheaval occurring on Wall Street, few people worried about whether their money was safe in the bank.  However, with the collapse of many national banks such as Washington Mutual, IndyMac, Wachovia – and more recently, New Frontier Bank in Greeley, CO – it is more important than ever to know what is insured and what is not and to know what steps could be taken to save your assets.
 
The FDIC provides insurance for deposits in most U.S. banks.  This insurance is currently limited to $250,000 per bank, per depositor.  This means that an individual with more than one account does not receive any additional insurance coverage.  The total insurance is limited to $250,000, no matter how many separate accounts an individual may have.

What can you do to keep your hard earned money safe?  
 
One of the ways is through the use of a Living Trust.  With a properly written Living Trust, a family can multiply the FDIC insured amount by the number of beneficiaries under the Trust. For a family of four, this means the account could be insured for $1,000,000.  The Living Trust account would be insured up to $250,000 per beneficiary if some conditions are met including that all the beneficiaries are family members.
 
One nice thing about a Living Trust is that money can be deposited and withdrawn at any time.  Due to the potential dangers of trusting the FDIC on traditional bank accounts, a Living Trust could potentially put a family in a much better position to ensure that more assets are backed by the FDIC. 

If the proverbial piggybank breaks, the trust will still be there with the real shiny kind of change.  Questions about how to set up a Living Trust should be directed to a local attorney that knows the ins and outs of this important issue.  Make sure that the only one breaking your piggy bank open is you.
 

Mike Robinson is senior partner with Robinson & Henry P.C.  Much thanks to Ryan Wood, Louise Wood and Julie Robinson for their help with this story