To those of you who have been checking this out, supporting me, and hopefully learning a bit along the way- I have created a new, more dynamic site for your enjoyment and use. Please go to:
www.frontlinefinancials.com
There you will find the same perspective, all my old posts, and some great new posts! I'm also providing useful links and a much more interactive interface. Let me know what you think!
Friday, May 29, 2009
Friday, May 22, 2009
Obama Makes a Smart (Unnoticed?) Move
Amid all the bad news that keeps getting sloshed around, a couple of days ago there was a VERY important bright spot that went largely unnoticed. For those of you who believe that President Obama is the second coming of Jesus, his pedestal just got a little higher. For those of you who think he's Satan's spawn, this is a classic "blind squirrel finding a nut" moment. For the rest of us, it's just one more piece of a large effort to ensure the stability of our banking system.
In October of last year, President Bush increased insurance coverage per individual from $100,000 to $250,000. This was done, essentially, to prevent a sweeping run on all banks. It was a brilliant move to build confidence that really cost taxpayers nothing (so far).
On May 20th, 2009 President Obama signed into law a continuation of the enormous increase in FDIC coverage. This additional coverage was set to expire on December 31 of this year. The new law extends the coverage through the end of 2013.
Here at my bank, we had already fielded several calls from concerned CD customers about this potential loss of coverage. One man went so far as to request something in writing from me stating that he would be allowed to pull his money if the coverage reversed back to $100,000, and we had done nothing to otherwise insure his funds. We were already developing a game plan to combat a run on our tiny little bank if the coverage had reverted. Depositors would have taken money out in droves to accommodate for the reversal of insurance. This could have been very bad not only for us, but for the system in general. We might have had a situation similar to the one I've discussed in a related blog post below.
So this is your good news headline of the day: "President Obama Averts Potential Run on the American Banking System, Seven Months in Advance"
Kudos Obama.
For more information on the extension, please see the following website:
http://www.fdic.gov/deposit/deposits/changes.html
Friday, May 15, 2009
The Death of a Bank: A brief explanation
Nearly every person has worried about what happens if their bank goes out of business. I field calls and get asked in person almost on a daily basis what a bank failure actually means to customers. What happens to my money? Can I access my funds? And, my favorite, “If the bank fails, do I get to stop paying on my loan???”
I thought this would be the perfect platform to briefly describe the most likely scenarios for a bank shutting down, what you can and can’t do following your bank failing, and where to find important information.
Here are the three most common (though not all-inclusive) scenarios.
1. Your bank fails and the FDIC takes it over without finding another bank to buy it.
2. Your bank fails and the FDIC finds a buyer of the deposits.
3. Your bank fails and the FDIC finds a buyer of the whole bank.
Scenario 1
Your bank is known to all regulators and bankers as the ugly, fat, annoying girl. Not only does it have a huge amount of problems on the surface, but it’s made up of such useless deposits and loans that nobody- not even the drunkest guy at the bar- will take her home.
If you have your deposits at this bank and they’re under the FDIC insurance limit, you’ll probably be sent a check for the balance of your account on the Monday following the Friday that the bank closes. If any part of your deposits is over the FDIC limit, you lose that amount of money (ONLY the amount that exceeds the limit). Over the weekend, the FDIC will contract with a big bank like Bank of America or SunTrust to allow transactions on the accounts to post as they normally would. You’ll have to open up another account at another bank immediately.
If you have a loan at this bank, you keep paying your loan, but might have to change where you send your payments. You will be strongly encouraged or flat out told to find another bank to take over your loan. If the loan is unsecured, you might be required to pay it immediately or find another bank to take it over. This is a bad scenario for people with loans, because the FDIC simply doesn’t have the right staff to service the accounts. It will get rid of them as fast as possible or sell them to another bank/private company. This doesn’t always turn out badly for loan customers, but it’s the worst scenario for you.
Scenario 2
To use a similar analogy, bankers and regulators think of you as a really attractive person but you have an STD. You’re hot, but they wouldn’t touch your assets even if you paid them.
If you have a deposit account with this bank, you’re perfectly fine. You won’t have to do anything but get used to a new bank’s name on your checks, debit cards, statements, etc. You’ll probably even get to work with the same staff with which you’re used to working. You’ll see the same smiling faces and hopefully get the same great service. Your accounts will also continue to be fully insured and you’ll have the peace of mind that comes with a stronger bank.
The only downside in this scenario is that the rate you’re currently paid on things with variable rates (money markets, savings accounts, checking with interest, etc) might be changed to a much lower rate. CD rates should be honored until maturity, but you will probably not be paid nearly as well when they renew.
If you have a loan with this bank, you’re in the same boat as Scenario 1 customers. The FDIC wants to get rid of you, and it doesn’t particularly care how it does it. See Scenario 1 for the breakdown.
Scenario 3
Keeping with the theme, your bank is as hot as Miss America (or Brad Pitt, for the ladies), has a great personality, and unfortunately was dumb enough to swallow a gallon e coli bacteria. With the proper penicillin, this will once again be an awesome bank.
If you have a deposit account with this bank, just like in Scenario 2, you’re perfectly fine. Go ahead and go on that weekend trip and don’t worry about your debit card working. Again, your accounts are fully FDIC insured immediately.
If you have a loan with this bank, you’re in luck. The new bank wants you and values you. They might give some customers a hard time, but they want to keep the vast majority of them. If you’re a bad loan customer (Don’t act like you don’t know you are), you’ll probably be harassed until you go away, get foreclosed on, or agree to some kind of painful workout. If you’re a good customer, just write the new bank name on your loan payments and keep rolling along merrily.
Important Information:
If your bank fails (or you think it might have failed), it is absolutely critical that you go to the following website:
www.fdic.gov
In the upper left hand corner, you will see something that says “Bank Closing Information – (Day the bank Closed)” and underneath, it will list the closed banks for that week. Click on your bank name and read EVERYTHING on each page. This will tell you exactly what you need to know regarding your accounts and what changes to expect, if any. It will also give you some interesting information detailing the transaction that took place and the loss to the FDIC fund.
The FDIC will also post information on every door and drive through window of every branch immediately upon closing the bank. This will basically detail the same information that you can find on the website.
Finally, always remember that your accounts, no matter how ugly or attractive your bank is, are fully insured up to the FDIC limit if they have a sign that says “FDIC Insured” posted in the lobby. There is absolutely no reason to worry about your money if you keep it under this limit. You will ALWAYS be paid that money…unless of course, the FDIC and US Government fall… but let’s not get into that just yet.
I thought this would be the perfect platform to briefly describe the most likely scenarios for a bank shutting down, what you can and can’t do following your bank failing, and where to find important information.
Here are the three most common (though not all-inclusive) scenarios.
1. Your bank fails and the FDIC takes it over without finding another bank to buy it.
2. Your bank fails and the FDIC finds a buyer of the deposits.
3. Your bank fails and the FDIC finds a buyer of the whole bank.
Scenario 1
Your bank is known to all regulators and bankers as the ugly, fat, annoying girl. Not only does it have a huge amount of problems on the surface, but it’s made up of such useless deposits and loans that nobody- not even the drunkest guy at the bar- will take her home.
If you have your deposits at this bank and they’re under the FDIC insurance limit, you’ll probably be sent a check for the balance of your account on the Monday following the Friday that the bank closes. If any part of your deposits is over the FDIC limit, you lose that amount of money (ONLY the amount that exceeds the limit). Over the weekend, the FDIC will contract with a big bank like Bank of America or SunTrust to allow transactions on the accounts to post as they normally would. You’ll have to open up another account at another bank immediately.
If you have a loan at this bank, you keep paying your loan, but might have to change where you send your payments. You will be strongly encouraged or flat out told to find another bank to take over your loan. If the loan is unsecured, you might be required to pay it immediately or find another bank to take it over. This is a bad scenario for people with loans, because the FDIC simply doesn’t have the right staff to service the accounts. It will get rid of them as fast as possible or sell them to another bank/private company. This doesn’t always turn out badly for loan customers, but it’s the worst scenario for you.
Scenario 2
To use a similar analogy, bankers and regulators think of you as a really attractive person but you have an STD. You’re hot, but they wouldn’t touch your assets even if you paid them.
If you have a deposit account with this bank, you’re perfectly fine. You won’t have to do anything but get used to a new bank’s name on your checks, debit cards, statements, etc. You’ll probably even get to work with the same staff with which you’re used to working. You’ll see the same smiling faces and hopefully get the same great service. Your accounts will also continue to be fully insured and you’ll have the peace of mind that comes with a stronger bank.
The only downside in this scenario is that the rate you’re currently paid on things with variable rates (money markets, savings accounts, checking with interest, etc) might be changed to a much lower rate. CD rates should be honored until maturity, but you will probably not be paid nearly as well when they renew.
If you have a loan with this bank, you’re in the same boat as Scenario 1 customers. The FDIC wants to get rid of you, and it doesn’t particularly care how it does it. See Scenario 1 for the breakdown.
Scenario 3
Keeping with the theme, your bank is as hot as Miss America (or Brad Pitt, for the ladies), has a great personality, and unfortunately was dumb enough to swallow a gallon e coli bacteria. With the proper penicillin, this will once again be an awesome bank.
If you have a deposit account with this bank, just like in Scenario 2, you’re perfectly fine. Go ahead and go on that weekend trip and don’t worry about your debit card working. Again, your accounts are fully FDIC insured immediately.
If you have a loan with this bank, you’re in luck. The new bank wants you and values you. They might give some customers a hard time, but they want to keep the vast majority of them. If you’re a bad loan customer (Don’t act like you don’t know you are), you’ll probably be harassed until you go away, get foreclosed on, or agree to some kind of painful workout. If you’re a good customer, just write the new bank name on your loan payments and keep rolling along merrily.
Important Information:
If your bank fails (or you think it might have failed), it is absolutely critical that you go to the following website:
www.fdic.gov
In the upper left hand corner, you will see something that says “Bank Closing Information – (Day the bank Closed)” and underneath, it will list the closed banks for that week. Click on your bank name and read EVERYTHING on each page. This will tell you exactly what you need to know regarding your accounts and what changes to expect, if any. It will also give you some interesting information detailing the transaction that took place and the loss to the FDIC fund.
The FDIC will also post information on every door and drive through window of every branch immediately upon closing the bank. This will basically detail the same information that you can find on the website.
Finally, always remember that your accounts, no matter how ugly or attractive your bank is, are fully insured up to the FDIC limit if they have a sign that says “FDIC Insured” posted in the lobby. There is absolutely no reason to worry about your money if you keep it under this limit. You will ALWAYS be paid that money…unless of course, the FDIC and US Government fall… but let’s not get into that just yet.
Tuesday, May 12, 2009
We’re out of Bullets
I was having a conversation the other day with an independently wealthy, good ‘ole southern man who was absolutely irate that he couldn’t sell one of his gas stations. This man explained to me that he had a very eager buyer and a property that easily generated profit to cover finance costs PLUS leave the new owner a fair amount of income.
He told me all this in order to try and get my bank to rethink doing the financing for the new buyer and asked me flat out why on earth we would turn it down. The answer was pretty simple. I told him, “We’re out of bullets.”
Knowing that he was both a Vietnam veteran and an avid hunter, I knew that he could understand this concept more easily than talking about things like capital ratios, liquidity, shrinking the balance sheet, etc. Instead of all that, I stuck to this analogy. The deal he wanted to get done was like seeing a 10-point deer right when you get up in the stand. It was like being able to take over a town in a war that is essential to enemy supply lines, but has no real protection. We would love to shoot it down…take it over… close the deal, but we don’t have any damn bullets. Now…maybe if you had a deal that was more like a duck we could strangle… or a peasant cart we could ambush and take over without a shot… that kind of deal we could look at doing. We do still have rocks and sling-shots.
For many banks (but by no means the majority), this story rings true every day. No matter how great a deal looks, banks simply do not have enough cash or capital (bullets) to do the deal. It has nothing to do with the borrowers. It’s not meant to be an insult. We just flat out can’t do it unless somebody pulls off a Normandy-like invasion to bring us fresh ammo.
He told me all this in order to try and get my bank to rethink doing the financing for the new buyer and asked me flat out why on earth we would turn it down. The answer was pretty simple. I told him, “We’re out of bullets.”
Knowing that he was both a Vietnam veteran and an avid hunter, I knew that he could understand this concept more easily than talking about things like capital ratios, liquidity, shrinking the balance sheet, etc. Instead of all that, I stuck to this analogy. The deal he wanted to get done was like seeing a 10-point deer right when you get up in the stand. It was like being able to take over a town in a war that is essential to enemy supply lines, but has no real protection. We would love to shoot it down…take it over… close the deal, but we don’t have any damn bullets. Now…maybe if you had a deal that was more like a duck we could strangle… or a peasant cart we could ambush and take over without a shot… that kind of deal we could look at doing. We do still have rocks and sling-shots.
For many banks (but by no means the majority), this story rings true every day. No matter how great a deal looks, banks simply do not have enough cash or capital (bullets) to do the deal. It has nothing to do with the borrowers. It’s not meant to be an insult. We just flat out can’t do it unless somebody pulls off a Normandy-like invasion to bring us fresh ammo.
Saturday, May 2, 2009
Meaningful Conversations
I thought it might be helpful following the extensive FDIC post last week to follow up with a conversation I just had with one of our customers. I was explaining to him a bit about how the FDIC works and why the government bailout was actually the "least costly" approach to saving the Financial World. Here's a snippet:
Him: "You know, if the government just keeps handing money over to banks that do nothing but hoarde it and lose more money, we're never going to get out of this..."
Me: "Well, believe it or not, banks are making a ton of loans still, and the bailout was necessary because of the huge amount of money that it would have taken for the FDIC to make good on its insurance promise."
Him: "It wouldn't have cost nearly as much for the FDIC to just shut down all the bad ones and let the good ones survive!"
Me: "Well, let's just pretend that this bank went out of business, ok? You have a few CD's with us that total about $50,000... and you're fully FDIC insured. Sound right so far?
Him: "Yep"
Me: "Alright, so we have about 6,000 customers who are in a similar position as you...and we're a very small bank, Agreed?"
Him: "Yep"
Me: "If we went out of business today, the FDIC would lose anywhere from 50 to 100 million dollars because of just us going out of business."
Him: "That's a lot of money!"
Me: "Right. Now if you think about a Bank of America or Citibank, they do business with something like 100 million people just like you... and are each about 100 times as big as we are. Can you imagine what the loss would be if they went under?"
Him: "Holy hell!"
Me: "And if they went out of business, do you think people would think their money was safe ANYwhere?"
Him: "No, I'd probably pull my money out and hide it under my mattress..."
Me: "That's exactly why they had to bailout the system. To make sure you, and 100 million other people, didn't do that exact thing."
Him: "Oh... well i guess that makes a lot of sense."
Him: "You know, if the government just keeps handing money over to banks that do nothing but hoarde it and lose more money, we're never going to get out of this..."
Me: "Well, believe it or not, banks are making a ton of loans still, and the bailout was necessary because of the huge amount of money that it would have taken for the FDIC to make good on its insurance promise."
Him: "It wouldn't have cost nearly as much for the FDIC to just shut down all the bad ones and let the good ones survive!"
Me: "Well, let's just pretend that this bank went out of business, ok? You have a few CD's with us that total about $50,000... and you're fully FDIC insured. Sound right so far?
Him: "Yep"
Me: "Alright, so we have about 6,000 customers who are in a similar position as you...and we're a very small bank, Agreed?"
Him: "Yep"
Me: "If we went out of business today, the FDIC would lose anywhere from 50 to 100 million dollars because of just us going out of business."
Him: "That's a lot of money!"
Me: "Right. Now if you think about a Bank of America or Citibank, they do business with something like 100 million people just like you... and are each about 100 times as big as we are. Can you imagine what the loss would be if they went under?"
Him: "Holy hell!"
Me: "And if they went out of business, do you think people would think their money was safe ANYwhere?"
Him: "No, I'd probably pull my money out and hide it under my mattress..."
Me: "That's exactly why they had to bailout the system. To make sure you, and 100 million other people, didn't do that exact thing."
Him: "Oh... well i guess that makes a lot of sense."
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