Who's really protecting your money?
Right?
The FDIC? What is that even really pot Like what is that? And then it's like the limit is to fifty there's been talks that they could potentially raise the limit higher. What about the limits for investing that's through SIPC. Is that the same will that be raised? Just can you just kind of make sense of the protection aspect of it from an investing in banking side.
Yeah, and we're getting this question every single day on Investipedia, as you can imagine, because people are really worried about their money. Yeah, they're worried about their money in the market, but they're worried about their money money right, their bags of cash in the bank that's supposed to be safe.
So most banks are ensured.
By what we call the FDIC Federal Deposit Insurance Corporation. This was formed after the Great Depression, after the big bank runs of the nineteen thirties to protect investors or savers, i should say, customers. And they've raised the limit over time because we've had more money to put in the bank. And that limit is two hundred and fifty thousand dollars and that is per individual. If you're married and have a joint account five hundred thousand dollars. That is your
money in the bank that is insured. If your bank goes out of business, you're going to get that money back within a few days once the FDIC takes over that bank. Right now, with Silicon Valley Bank and with Signature Bank, the two banks that failed, the FDIC, the Treasury and the Federal Reserve decided to take extraordinary measures and consider them systemically important banks, and they raised the
deposit insurance to make it unlimited for all depositors. So if you had money in those banks those banks were taken over, you're getting all of your money back one way or the other.
Have they made that blanket raise for all banks? Absolutely not. Can they not? Exactly?
And I'll explain why in a second. But that's the FDIC, that is its own branch of the government. It has funds and insurance fund that it pays out people whose bank goes under that banks can been contributing to for years. I think there's over one hundred billion dollars in that account right now, but they can always take in more. So that's on the banking side. On the investing side, if you have a brokerage account, pick your broker, I
don't care which. And your broker gets taken over or goes under or gets seized by a regulator, it's the SIPC that guarantees your money two hundred and fifty thousand dollars per individual, five hundred thousand dollars per couple. That doesn't mean they're protect you against making bad investments. That doesn't mean they protect you against taking bad advice. That doesn't mean they protect you against buying products that go under. That means they protect you if your broker goes under.
So it's very important that you understand the distinction between those two agencies and what they protect.
So we saw the collapse of some banks, right, we saw a signature SVB. A lot of us remember two thousand and eight, and I'll get worried. Right, So, can you explain the difference between what happened in two thousand and eight and what we're seeing now with some of the regional banks. I know they had a rebound today, and we'll get into that a little bit later, But the difference between the two scenarios in two thousand and eight and now in twenty twenty three, what what's happening.
Yeah, So in two thousand and seven two thousand and eight, banks were over leveraged. They had bought too many mortgage backed securities. They assumed, like a lot of people did, that the housing market in the United States was just going to keep rolling and keep going higher and higher, and they gave credit out a lot of lenders to
people that weren't worthy of getting that credit. So when the economy hit the skids and we started to go into a recession, people were getting foreclosed on their homes. They realized that all these people they had loaned money to were not.
Really of good credit.
But banks had loaded up on this credit, on these mortgage backed securities, and they started to fail as people were not able to pay their mortgages. And that was a liquidity crisis where banks all of a sudden didn't have money to pay back their depositors, they didn't have money to pay lenders, they didn't have money coming in, and they weren't lending money to each other. And some of the biggest banks out there. You were talking about
mistakes you made. I and I'm the guy who invested in Lehman Brothers at eighty, at fifty, at thirty, at twenty at ten and finally at two, I lost a lot of money and.
That can we give a comparison? At the time, Lemo was like, go earners, what's up? You ever walk into a small business and everything just works like the checkout is fast, the receipts are digital, tipping is a breeze, and you're out the door before the line even builds odds are they're using Square. We love supporting businesses that
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Foo or like Lemen, was up one hundred and ten year old bank that was way over leveraged, and the Federal Reserve decided to just let it go. Now there's another bank called bear Stearns that was equally as leverage. These were multi trillion dollar banks. Now they engineered a sale of bear Stearns to another bank, and that bank.
Was was that JP Morten? Was it? Yeah?
I think it was the JP Morgan for two bucks a share, so they saved that bank. So these were the biggest banks in the world that were going under and having what we call a liquidity crisis. They could not borrow money and they were not lending money.
To each other.
So the Federal Reserve, the treasure in the FDIIC saw what was happening with Silicon Valley Bank, and whether they should have seen that months ago we could talk about. But they saw the fact that they were not able to pay back their depositors and that they deemed them, even though they were only the sixteenth biggest bank in the country systemically important. If they couldn't pay anybody back and other banks.
Wouldn't lend to them, banks wouldn't loan to.
Each other, and we would get into a liquidity crisis
like we saw in two thousand and eight. Now, the biggest difference is that after two thousand and eight two thousand and nine, there was there are a lot of tough regulations put in place, the big ones, the Dodd Frank Regulation Act that made banks have to hold a certain amount of capital reserves in case their creditors or their depositors came for their money, and that for the biggest banks, the twenty biggest banks has to be a certain percentage of all deposits and assets on hand.
So they're in much stronger shape than they used to be. Even though the Trump administration.
Rolled back some of those laws, most of them are still in place. So the reserves these banks hold are huge right now. And there's about seventeen and a half trillion dollars in US banks right now. The run we had out at Silicon Valley Bank and the little one we had at Signature Bank was not that big in comparison, there was only one hundred and eighty billion dollars in deposits. We're talking about a banking system that's almost eighteen trillion dollars.
Asks a good question about what are the differences that you saw between twenty eight and twenty twenty three. What similar is do you see like in the mismanagement of risk profiles from mortgage backed securities in two thousand and eight and like the venture capital debt bubble, and what parallels do you see like we're making the same mistakes.
Great question.
So we always say the Federal Reserve raises interest rate until something breaks, Well, something broke. That was the balance sheets of a lot of banks, a lot of regional banks. Why what do regional banks do with your money? What are banks in general do with our money? They loan it out to one another, But they keep a lot of those deposits in government backed securities US treasuries and
mortgage backed securities. Why those are supposedly the safest investments on planet Earth, maybe in the whole solar system, because.
The US government, even though it has an enormous debt.
Usually pays off its debt little by little, so they're safe. But when the Federal Reserve raise interest rates like it did for the past thirteen months aggressively north of five percent here, then something breaks, and that is usually the value of those bonds. As those interest rates went up, yields went up, bond prices plummeted, so the value of the assets and those banks that were held against deposits when they mark to market them.
And that means if they say, if.
We had to sell those today, what those be worth? They were not worth enough to cover the depositors. So now the big one of the big differences is banks have to have enough reserves to be able to even if they have marked to market losses to cover their depositors.
That's one big thing.
But those rising interest rates, they cause a lot of bank failures. That happened way back in the seventies with Continental Bank. The Fed Reserve raised interest rates aggressively in the eighties under Paul Volker, the tallest FED chairman out there, to break inflation which was twelve percent. And guess what, Orange County, California. The whole county failed. The whole county went bankrupt. One of the richest counties in the world
went bankrupt. So your raise rates again really aggressively. In the past year. We've lost two banks so far, we may lose another.
My graduates from my school being forced bad drops drop drop.
Bad drop Drop.
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