FDIC risk

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jason
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FDIC risk

Post by jason » Wed Jan 16, 2019 1:20 pm

HB talked about the fact that the FDIC is underfunded and insured bank deposits are a bit risky because of that. A law was passed in 2009 that authorized the FDIC to borrow as much as $500 billion from the treasury, as discussed in the article below:
https://www.marketwatch.com/story/obama ... n-for-fdic
That law is still in effect, today. Does this mean that HB's view on the FDIC is outdated? I read somewhere that total FDIC insured bank deposits are $6 trillion, so is it realistically possible that $500 billion would not be enough?
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pugchief
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Re: FDIC risk

Post by pugchief » Wed Jan 16, 2019 1:50 pm

The US govt could theoretically default on treasuries, too. IMO, the risk of FDIC default is minimal. But either could certainly happen in a SHTF scenario.
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Xan
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Re: FDIC risk

Post by Xan » Wed Jan 16, 2019 2:48 pm

I don't think we expect anything but gold to be worth much it a SHTF scenario. I don't have really any qualms about FDIC insurance, regardless of the 2009 law. The government didn't even let people's car warranties lapse when GM went under; there's no way they won't make good on FDIC insurance.
drumminj
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Re: FDIC risk

Post by drumminj » Wed Jan 16, 2019 10:28 pm

I think the question isn't necessarily about the insurance paying out, but how quickly they will pay out, and what the dollars will be worth when paid out.
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Kbg
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Re: FDIC risk

Post by Kbg » Wed Jan 16, 2019 11:05 pm

Everyone knows the government prints the money, right? You’ll get your money back, but it may not be worth as much.
Hal
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Re: FDIC risk

Post by Hal » Thu Jan 17, 2019 4:08 am

They have a similar thing to the FDIC in Australia, but there's a catch.

The Deposit Guarantee is activated when a bank fails "but"

if the newly legislated "bail in" is activated and the bank is saved, then since the bank has not failed, the deposit guarantee is not activated. Neat trick :o

Do you have bail in legislation in the US ?

Full details here: https://www.youtube.com/channel/UCKWDsc ... -bQ/videos
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sophie
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Re: FDIC risk

Post by sophie » Thu Jan 17, 2019 7:22 am

A single bank failure would be no problem, but FDIC insurance could fail in a systemic financial collapse. See 2008: banks loading up on subprime mortgages -> buy credit default swaps to insure risk from mostly AIG -> bottom falls out of housing market -> mortgage defaults -> AIG can't make good on the insurance -> systemic bank failures. Fortunately, the government was able to intervene before step 5.

There is nothing to prevent something like this from happening again. It's heartening that the US government was able and willing to step in, but that effort could easily have failed. It almost did, in fact. If you recall, TARP was initially voted down.
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jhogue
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Re: FDIC risk

Post by jhogue » Thu Jan 17, 2019 12:57 pm

Also note that over its two century history, the U.S. Treasury has never failed to make full and prompt payment on Treasury-issued securities. If you own Treasuries, you will never have to stand in line while the FDIC takes over your failed bank and fixes the mess.

So, back to the OP's question: I would say that Harry Browne's views on Treasuries vs. FDIC-insured securities for the Permanent Portfolio is remarkably intact and vindicated as recently as the events of the financial crisis of 2008-2009.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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sophie
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Re: FDIC risk

Post by sophie » Thu Jan 17, 2019 8:41 pm

Speaking of Treasuries....

Vanguard's Treasury-only money market has been open for a while, with a minimum initial investment of $50K. It has an astonishingly low ER of 0.09, which is really worth it as an alternative to the T bill autoroll game or ETFs, which are kind of a pain to sell & buy.

Question: does anyone know if there's a minimum balance on that fund, once you've scraped together the $50K and bought in? And, can you set it up with check-writing?

Ironically, due to interest on Treasuries being exempt from state/local taxes, for us NYC or CA residents the Treasury fund does almost as well as a CD.
stuper1
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Re: FDIC risk

Post by stuper1 » Thu Jan 17, 2019 10:24 pm

From what I've read, once you are in with $50k+, you can let your amount in the fund drop below $50k and they won't kick you out. Not sure about check writing.
boglerdude
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Re: FDIC risk

Post by boglerdude » Fri Jan 18, 2019 12:22 am

> There is nothing to prevent something like this from happening again

Capital requirements aka skin in the game. They've doubled, but we'll see if that's enough

https://www.bloomberg.com/quicktake/ban ... tal-ratios
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jhogue
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Re: FDIC risk

Post by jhogue » Fri Jan 18, 2019 10:52 am

sophie wrote:
Thu Jan 17, 2019 8:41 pm
Speaking of Treasuries....

Vanguard's Treasury-only money market has been open for a while, with a minimum initial investment of $50K. It has an astonishingly low ER of 0.09, which is really worth it as an alternative to the T bill autoroll game or ETFs, which are kind of a pain to sell & buy.

Question: does anyone know if there's a minimum balance on that fund, once you've scraped together the $50K and bought in? And, can you set it up with check-writing?

Ironically, due to interest on Treasuries being exempt from state/local taxes, for us NYC or CA residents the Treasury fund does almost as well as a CD.
For $50 K I would rather have T bills on autoroll at Fidelity than anybody’s money market fund:

1. Guaranteed liquidity is more important than temporary short term yield for PP Cash.
2. The longer I stay in the HBPP, the more aware I become of expense ratios and management risk. Like a lot of people, I love to "roll my own."
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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