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