Multi-Millionaires and Billionaires Do End Run Around on FDIC Limitations

08-06-2010 • EconomicPolicyJournal.com

FDIC insurance on a per bank basis is capped at $250,000 per account. The idea behind this cap is that large investors, multi-millionaires and billionaires, will have some exposure to loss of their funds if the bank they put their money in goes under. This is viewed as a check on bank excess risk, since a bank would not be able to attract large sums of money if multi-millionaires and billionaires feared the risk being taken at a given bank and did not put their funds with such a bank. Thanks to a column by Nassim Nicholas Taleb, it is now clear that hustlers, like former Fed vice-chairman, Alan Blinder, are promoting a loophole that allows multi-millionaires and billionaires to get every penny they have insured by the FDIC, damn the limits. In other words, a major check on bank riskiness does not exist. The FDIC is either unaware of this extremely dangerous move around the check on banks, or is aware and has kept absolutely silent as to the dangerous procedure. How are multi-millionaires and billionaires getting around the limit? Through a type of bundling, and then unbundling, all done by computers, which provides an end run around the necessity of a multi-millionaires and billionaires to actually fill out forms at each bank where they open accounts. There's even a web site that explains how this is done: CDARS® – the Certificate of Deposit Account Registry Service® – is the most convenient way for safety-conscious investors to access FDIC insurance on multi-million-dollar deposits. With CDARS, you sign one agreement with a participating financial institution of your choice, earn one interest rate per maturity, and receive one regular statement. It's that easy! They even have a video that goes into more detail right here. Senator Dodd has just been quoted as supporting FDIC Chairwoman Sheila Bair as a candidate for the new Consumer Financial Protection Bureau: Dodd said Federal Deposit Insurance Corp. Chairman Sheila Bair, 56, knows the legislation and would have easily won confirmation to lead the consumer agency if she were interested in the job. He said he urged Bair to pursue it because she has experience running an agency and pressed for foreclosure relief for consumers. Bair didn’t want the job, Dodd said. Support for Bair “I did some checking on Sheila Bair and I was going to have very little difficulty getting Sheila Bair confirmed,” said Dodd, whose committee will consider the nomination. “I’d probably confirm her in a couple of days. That’s how strongly people felt, Democrats and Republicans As Congress becomes aware of the multi-millionaire/billionaire loophole for total FDIC coverage that adds tremendous additional risk to the banking sector (Because the multi-millionaire/billionaire at risk on deposits is removed), Bair is lucky to survive at the FDIC. She either was clueless that the multi-millionaires/billionaires were doing this end run around her, or she was aware and never said a word about it to Congress. In either case, the risk to the banking sector has been expanded, and the super-wealthy have, again found their way around limitations aimed directly at them. UPDATE: Yesterday, I contacted the FDIC about the program specifically mentioned by Alan Blinder to Taleb. I received the following email response from FDIC spokesperson, Greg Hernandez: I checked on your query. My colleagues tell me that this is most likely CEDARS that was created by the Promontory Interfinancial Network. We believe that this is simply a CDARS-type arrangement operated by a deposit broker. FDIC is not part of CDARS. However, the FDIC has looked at their program and given them an opinion saying that an individual’s deposits in this program will get “per bank” insurance coverage. Bottom Line: Multi-millionaires and billionaires are conducting an end run around the supposed limitations of FDIC insurance, literally all their billions are protected, with the written blessing from the FDIC. The only person who seemingly wouldn't be protected is a small businessman or some grandmother who inherited a few million and who aren't in the club of insider that knows how to get around the rules of having to fill out forms at each and every individual bank you deal with. Most shocking is that there is not a peep out of Sheila Bair about this method being used by multi-millionaires and billionaires which clearly goes against the spirit of the reason behind FDIC insurance limitations. And which adds untold serious risk to the banking system because it provides moral hazard cover to these multi-millionaires and billionaires so that they don't have to scrutinize the banks where they deposit their money.

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Multi-Millionaires and Billionaires Do End Run Around on FDIC Limitations

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