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Scholars Corner: IS YOUR MONEY SAFE IN BANKS? · Earn Your Leisure

• 0:00
  Speaker 1: Who's really protecting your money?
• 0:01
  Speaker 2: Right?
• 0:01
  Speaker 1: The FDIC? What is that even really pot Like what
• 0:06
  Speaker 1: is that? And then it's like the limit is to
• 0:09
  Speaker 1: fifty there's been talks that they could potentially raise the
• 0:12
  Speaker 1: limit higher. What about the limits for investing that's through SIPC.
• 0:20
  Speaker 1: Is that the same will that be raised? Just can
• 0:23
  Speaker 1: you just kind of make sense of the protection aspect
• 0:26
  Speaker 1: of it from an investing in banking side.
• 0:29
  Speaker 3: Yeah, and we're getting this question every single day on Investipedia,
• 0:32
  Speaker 3: as you can imagine, because people are really worried about
• 0:34
  Speaker 3: their money. Yeah, they're worried about their money in the market,
• 0:36
  Speaker 3: but they're worried about their money money right, their bags
• 0:39
  Speaker 3: of cash in the bank that's supposed to be safe.
• 0:42
  Speaker 2: So most banks are ensured.
• 0:44
  Speaker 3: By what we call the FDIC Federal Deposit Insurance Corporation.
• 0:47
  Speaker 3: This was formed after the Great Depression, after the big
• 0:50
  Speaker 3: bank runs of the nineteen thirties to protect investors or savers,
• 0:54
  Speaker 3: i should say, customers. And they've raised the limit over
• 0:57
  Speaker 3: time because we've had more money to put in the bank.
• 1:00
  Speaker 3: And that limit is two hundred and fifty thousand dollars
• 1:02
  Speaker 3: and that is per individual. If you're married and have
• 1:04
  Speaker 3: a joint account five hundred thousand dollars. That is your
• 1:07
  Speaker 3: money in the bank that is insured. If your bank
• 1:09
  Speaker 3: goes out of business, you're going to get that money
• 1:11
  Speaker 3: back within a few days once the FDIC takes over
• 1:15
  Speaker 3: that bank. Right now, with Silicon Valley Bank and with
• 1:19
  Speaker 3: Signature Bank, the two banks that failed, the FDIC, the
• 1:22
  Speaker 3: Treasury and the Federal Reserve decided to take extraordinary measures
• 1:26
  Speaker 3: and consider them systemically important banks, and they raised the
• 1:30
  Speaker 3: deposit insurance to make it unlimited for all depositors. So
• 1:33
  Speaker 3: if you had money in those banks those banks were
• 1:35
  Speaker 3: taken over, you're getting all of your money back one
• 1:38
  Speaker 3: way or the other.
• 1:40
  Speaker 2: Have they made that blanket raise for all banks? Absolutely not.
• 1:43
  Speaker 2: Can they not? Exactly?
• 1:45
  Speaker 3: And I'll explain why in a second. But that's the FDIC,
• 1:48
  Speaker 3: that is its own branch of the government. It has
• 1:50
  Speaker 3: funds and insurance fund that it pays out people whose
• 1:53
  Speaker 3: bank goes under that banks can been contributing to for years.
• 1:57
  Speaker 3: I think there's over one hundred billion dollars in that
• 1:59
  Speaker 3: account right now, but they can always take in more.
• 2:01
  Speaker 3: So that's on the banking side. On the investing side,
• 2:04
  Speaker 3: if you have a brokerage account, pick your broker, I
• 2:07
  Speaker 3: don't care which. And your broker gets taken over or
• 2:09
  Speaker 3: goes under or gets seized by a regulator, it's the
• 2:13
  Speaker 3: SIPC that guarantees your money two hundred and fifty thousand
• 2:16
  Speaker 3: dollars per individual, five hundred thousand dollars per couple. That
• 2:20
  Speaker 3: doesn't mean they're protect you against making bad investments. That
• 2:22
  Speaker 3: doesn't mean they protect you against taking bad advice. That
• 2:25
  Speaker 3: doesn't mean they protect you against buying products that go under.
• 2:28
  Speaker 3: That means they protect you if your broker goes under.
• 2:31
  Speaker 3: So it's very important that you understand the distinction between
• 2:35
  Speaker 3: those two agencies and what they protect.
• 2:37
  Speaker 4: So we saw the collapse of some banks, right, we
• 2:39
  Speaker 4: saw a signature SVB. A lot of us remember two
• 2:43
  Speaker 4: thousand and eight, and I'll get worried. Right, So, can
• 2:47
  Speaker 4: you explain the difference between what happened in two thousand
• 2:50
  Speaker 4: and eight and what we're seeing now with some of
• 2:52
  Speaker 4: the regional banks. I know they had a rebound today,
• 2:54
  Speaker 4: and we'll get into that a little bit later, But
• 2:56
  Speaker 4: the difference between the two scenarios in two thousand and
• 2:59
  Speaker 4: eight and now in twenty twenty three, what what's happening.
• 3:02
  Speaker 3: Yeah, So in two thousand and seven two thousand and eight,
• 3:05
  Speaker 3: banks were over leveraged. They had bought too many mortgage
• 3:08
  Speaker 3: backed securities. They assumed, like a lot of people did,
• 3:11
  Speaker 3: that the housing market in the United States was just
• 3:13
  Speaker 3: going to keep rolling and keep going higher and higher,
• 3:16
  Speaker 3: and they gave credit out a lot of lenders to
• 3:18
  Speaker 3: people that weren't worthy of getting that credit. So when
• 3:22
  Speaker 3: the economy hit the skids and we started to go
• 3:24
  Speaker 3: into a recession, people were getting foreclosed on their homes.
• 3:27
  Speaker 3: They realized that all these people they had loaned money
• 3:29
  Speaker 3: to were not.
• 3:30
  Speaker 2: Really of good credit.
• 3:31
  Speaker 3: But banks had loaded up on this credit, on these
• 3:33
  Speaker 3: mortgage backed securities, and they started to fail as people
• 3:37
  Speaker 3: were not able to pay their mortgages. And that was
• 3:39
  Speaker 3: a liquidity crisis where banks all of a sudden didn't
• 3:42
  Speaker 3: have money to pay back their depositors, they didn't have
• 3:45
  Speaker 3: money to pay lenders, they didn't have money coming in,
• 3:48
  Speaker 3: and they weren't lending money to each other. And some
• 3:50
  Speaker 3: of the biggest banks out there. You were talking about
• 3:52
  Speaker 3: mistakes you made. I and I'm the guy who invested
• 3:54
  Speaker 3: in Lehman Brothers at eighty, at fifty, at thirty, at
• 3:58
  Speaker 3: twenty at ten and finally at two, I lost a
• 4:00
  Speaker 3: lot of money and.
• 4:02
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• 5:56
  Speaker 3: Foo or like Lemen, was up one hundred and ten
• 5:59
  Speaker 3: year old bank that was way over leveraged, and the
• 6:02
  Speaker 3: Federal Reserve decided to just let it go. Now there's
• 6:05
  Speaker 3: another bank called bear Stearns that was equally as leverage.
• 6:07
  Speaker 3: These were multi trillion dollar banks. Now they engineered a
• 6:10
  Speaker 3: sale of bear Stearns to another bank, and that bank.
• 6:14
  Speaker 2: Was was that JP Morten? Was it? Yeah?
• 6:19
  Speaker 3: I think it was the JP Morgan for two bucks
• 6:21
  Speaker 3: a share, so they saved that bank. So these were
• 6:23
  Speaker 3: the biggest banks in the world that were going under
• 6:26
  Speaker 3: and having what we call a liquidity crisis. They could
• 6:28
  Speaker 3: not borrow money and they were not lending money.
• 6:30
  Speaker 2: To each other.
• 6:31
  Speaker 3: So the Federal Reserve, the treasure in the FDIIC saw
• 6:34
  Speaker 3: what was happening with Silicon Valley Bank, and whether they
• 6:36
  Speaker 3: should have seen that months ago we could talk about.
• 6:39
  Speaker 3: But they saw the fact that they were not able
• 6:41
  Speaker 3: to pay back their depositors and that they deemed them,
• 6:44
  Speaker 3: even though they were only the sixteenth biggest bank in
• 6:46
  Speaker 3: the country systemically important. If they couldn't pay anybody back
• 6:49
  Speaker 3: and other banks.
• 6:50
  Speaker 2: Wouldn't lend to them, banks wouldn't loan to.
• 6:52
  Speaker 3: Each other, and we would get into a liquidity crisis
• 6:55
  Speaker 3: like we saw in two thousand and eight. Now, the
• 6:56
  Speaker 3: biggest difference is that after two thousand and eight two
• 6:58
  Speaker 3: thousand and nine, there was there are a lot of tough
• 7:00
  Speaker 3: regulations put in place, the big ones, the Dodd Frank
• 7:03
  Speaker 3: Regulation Act that made banks have to hold a certain
• 7:06
  Speaker 3: amount of capital reserves in case their creditors or their
• 7:10
  Speaker 3: depositors came for their money, and that for the biggest banks,
• 7:13
  Speaker 3: the twenty biggest banks has to be a certain percentage
• 7:16
  Speaker 3: of all deposits and assets on hand.
• 7:18
  Speaker 2: So they're in much stronger shape than they used to be.
• 7:20
  Speaker 2: Even though the Trump administration.
• 7:22
  Speaker 3: Rolled back some of those laws, most of them are
• 7:24
  Speaker 3: still in place. So the reserves these banks hold are
• 7:27
  Speaker 3: huge right now. And there's about seventeen and a half
• 7:30
  Speaker 3: trillion dollars in US banks right now. The run we
• 7:32
  Speaker 3: had out at Silicon Valley Bank and the little one
• 7:34
  Speaker 3: we had at Signature Bank was not that big in comparison,
• 7:37
  Speaker 3: there was only one hundred and eighty billion dollars in deposits.
• 7:40
  Speaker 3: We're talking about a banking system that's almost eighteen trillion dollars.
• 7:45
  Speaker 5: Asks a good question about what are the differences that
• 7:47
  Speaker 5: you saw between twenty eight and twenty twenty three. What
• 7:50
  Speaker 5: similar is do you see like in the mismanagement of
• 7:53
  Speaker 5: risk profiles from mortgage backed securities in two thousand and
• 7:57
  Speaker 5: eight and like the venture capital debt bubble, and what
• 8:01
  Speaker 5: parallels do you see like we're making the same mistakes.
• 8:04
  Speaker 2: Great question.
• 8:05
  Speaker 3: So we always say the Federal Reserve raises interest rate
• 8:08
  Speaker 3: until something breaks, Well, something broke. That was the balance
• 8:11
  Speaker 3: sheets of a lot of banks, a lot of regional banks.
• 8:14
  Speaker 3: Why what do regional banks do with your money? What
• 8:16
  Speaker 3: are banks in general do with our money? They loan
• 8:19
  Speaker 3: it out to one another, But they keep a lot
• 8:20
  Speaker 3: of those deposits in government backed securities US treasuries and
• 8:24
  Speaker 3: mortgage backed securities. Why those are supposedly the safest investments
• 8:27
  Speaker 3: on planet Earth, maybe in the whole solar system, because.
• 8:30
  Speaker 2: The US government, even though it has an enormous debt.
• 8:33
  Speaker 3: Usually pays off its debt little by little, so they're safe.
• 8:36
  Speaker 3: But when the Federal Reserve raise interest rates like it
• 8:38
  Speaker 3: did for the past thirteen months aggressively north of five
• 8:42
  Speaker 3: percent here, then something breaks, and that is usually the
• 8:46
  Speaker 3: value of those bonds. As those interest rates went up,
• 8:49
  Speaker 3: yields went up, bond prices plummeted, so the value of
• 8:52
  Speaker 3: the assets and those banks that were held against deposits
• 8:55
  Speaker 3: when they mark to market them.
• 8:57
  Speaker 2: And that means if they say, if.
• 8:58
  Speaker 3: We had to sell those today, what those be worth?
• 9:00
  Speaker 3: They were not worth enough to cover the depositors. So
• 9:03
  Speaker 3: now the big one of the big differences is banks
• 9:06
  Speaker 3: have to have enough reserves to be able to even
• 9:08
  Speaker 3: if they have marked to market losses to cover their depositors.
• 9:11
  Speaker 2: That's one big thing.
• 9:12
  Speaker 3: But those rising interest rates, they cause a lot of
• 9:14
  Speaker 3: bank failures. That happened way back in the seventies with
• 9:18
  Speaker 3: Continental Bank. The Fed Reserve raised interest rates aggressively in
• 9:21
  Speaker 3: the eighties under Paul Volker, the tallest FED chairman out there,
• 9:25
  Speaker 3: to break inflation which was twelve percent. And guess what,
• 9:28
  Speaker 3: Orange County, California. The whole county failed. The whole county
• 9:31
  Speaker 3: went bankrupt. One of the richest counties in the world
• 9:34
  Speaker 3: went bankrupt. So your raise rates again really aggressively. In
• 9:37
  Speaker 3: the past year. We've lost two banks so far, we
• 9:39
  Speaker 3: may lose another.
• 9:42
  Speaker 1: My graduates from my school being forced bad drops drop drop.
• 9:49
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