Friday, August 6, 2010

Multi-Millionaires and Billionaires Do End Run Around on FDIC Limitations on Insurance Coverage, with the Blessing of the FDIC

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.


  1. Wenzel, CDARs is perfectly legit--the money is farmed out to many banks to take advatage of the insurance coverage. It's just that they have worked at making the process efficient--maybe that's spooking you. Many community banks, in addition to large banks, offer this service.

  2. Then what's the point of having any insurance limitation if billionaires can get around it?

    I'll bet thete are people at you bank who have over 250k on deposit who aren't aware of the CDARS edge? Am I correct?

  3. We haven't yet offered it yet, but may soon do so.

    Agree, insurance ultimately adds to the overall risk in the system--bad banks are shielded from market forces; people don't shop banks like they would a new Chevy.

  4. Robert, I think you misunderstand the point of the FDIC. The purpose of the FDIC is not to reduce, but to subsidize moral hazard by circumventing market discipline on banks. It would be silly of them to oppose private actors who are furthering the same purpose.

  5. All of our clients know about CDARS (I work for an independent trust company). On one hand I agree that there is no point in the FDIC having a limit if billionaires can just get around it. On the other hand, if the government is going to stupidly subsidize moral hazard, why should billionaires be excluded just because they have a lot of money? What's good for the goose is good for the gander.

  6. I see no difference in CDARs and an individual taking the time and effort to open multiple bank accounts to have their money insured. CDARs value is efficiency, that's all.

  7. I don't think for a second Wenzel is confused about what FDIC does and/or claims to do or wether or not CDAR's are legal, etc.

    The point of Wenzel's blog post/aricle is - to me anyway - to expose the FDIC as a enhancer of risk to the overall system...a source of moral hazard...a political underminer of free markets...a threat to our society.

  8. Sean, you're on point. You never know when something will get picked up and someone runs with it. Ironically, in a world without moral hazard, a CDARS-type program would probably be how the average person managed risk of loss on deposits. With technology, there's no reason a person couldn't have dozens of bank accounts with a seemless single interface.

  9. I just opened an account with a local back the other day because I already had the max FDIC insured $500k in two other banks (joint accounts). They informed me of CDARS and I thought, what a good idea! That is, until I found out the interest rate. You think 2% in a regular MM is bad… It doesn’t even make sense to go that route. I would rather go to a bunch of different banks and open accounts.

  10. @Mike in Alaska

    The entire point of the limitation on a gurantee at any one bank is so that the super wealthy can't just open up multiple accounts. A billionaire (just one billion in cash)would have to open up 400 individual accounts.

    Sean O'Donnell put it (above) best:

    [T]he FDIC [is] a enhancer of risk to the overall system...a source of moral hazard...a political underminer of free markets...a threat to our society.

  11. I'm pretty sure these types of deposits are nothing new. The bank I work for takes in large amounts of brokered CDs (we currently have about $150 million in $2-10 million chunks). These are entirely covered by FDIC insurance because the broker pools together a lot of depositors, each under the FDIC limit. In addition to being able to shop around the country for the best rate for their clients, I imagine the broker is also breaking up larger amounts of money for clients in excess of the FDIC's limit and spreading across many banks.

    It seems weird to me that Taleb made it sound like some secret billionaire scheme when it's a totally open and legal practice. Sure it definitely increases moral hazard, but it's widely known and accepted in the banking industry.

  12. So CDARS is where you keep all your money at one bank and they do the splitting up of your money among several banks. Could there be a problem if the CDARS bank goes out of business? Can you then find out all the banks where your money was split up and get all your money back?

    1. If the CDARS bank you're working with went under, because you're not actually invested in that single bank, all your money is actually still safe in the other banks that haven't failed. And if you're at or under the FDIC limit at the failed bank, you would be reimbursed for that institution.