FDIC-insured: The safest your money can be

Mike Stuckey Senior news editor • Profile • E-mail

If Wall Street’s meltdown is tempting you to take your money out of the bank and put it under your mattress or bury in the back yard, don’t — at least not if your cash is insured by the FDIC.

While bankers, economists and politicians argue about the need for a federal bailout of the nation’s financial system and how it should work, there’s little disagreement with the belief that, no matter how many U.S. banks collapse, the Federal Deposit Insurance Corp. will make sure not a penny is lost from insured accounts.

“I would not worry about it and I’m no Pollyanna,” said Thomas Ferguson, a political science professor at the University of Massachusetts. Ferguson, who has studied Depression-era economics and the connection between money and politics, is flat certain that “they’re never going to run out of money for the FDIC.”

Whether taxpayers will have to chip in to make that happen is another story.

Created by Congress in 1933 at the height of the Great Depression amid thousands of U.S. bank failures, the FDIC is an independent federal agency charged with preserving and promoting public confidence in the nation’s financial system. The FDIC does this chiefly through a giant mutual insurance pool, which is funded by the banks themselves, not taxpayers. Currently holding about $45 billion, the insurance fund guarantees the safety of individual bank and thrift accounts up to $100,000. The National Credit Union Administration serves a similar function for accounts in most credit unions.

When a bank fails and is closed by a state or federal regulator, the FDIC steps in to help clean up the mess. Commonly, the agency sells the bank’s deposits and loans to another bank. “Most of the time, the transition is seamless from the customer's point of view,” the FDIC says on its Web site. However, when no buyer surfaces, the FDIC must use its insurance pool to help pay off depositors.

FDIC board chairwoman wins praise
The FDIC’s 4,500-member staff, which oversees deposits at 8,451 institutions, is managed by a board of five directors, appointed by the president and confirmed by the Senate. Current board Chairwoman Sheila C. Bair has won praise from members of both political parties for recognizing the impending sub-prime mortgage debacle shortly after taking the FDIC’s reins in mid-2006, announcing in a speech a year ago that “we have a huge problem on our hands.”

Since then, Bair’s agency has presided over more than a dozen bank failures and taken a substantial hit to its insurance fund. The FDIC has brokered deals on some of the largest failures – JPMorgan’s purchase of Washington Mutual last week, and the sale of Wachovia to Citigroup this week – averting payments from the pool. But the July closure of California’s IndyMac bank, for which there was no buyer, tapped the FDIC insurance fund for $8.9 billion.

While the American Bankers Association emphasizes that 98 percent of U.S. banks currently have the highest rankings that regulators can give them, critics point out that IndyMac was not listed as a troubled bank by the FDIC when it went belly up in the summer. They suggest that future costs of some of the deals brokered by the FDIC, along with impending bank failures, will require a taxpayer-funded bailout of the insurance fund.

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