You might scratch your head when you hear Wall Street pundits referring to the current market as “directionless.” How can that be, when the markets can spike a few hundred points one day and then take back all those gains, and then some, the next?
These crazy conditions have caused many investors to cash out of the markets and bank their cash for “better days.” Meanwhile, those of us who trade options have been enjoying these wild days, capturing quick — and huge — profits in a matter of days or even hours, thanks to these unpredictable conditions.
Give me a wild-and-crazy market any day — it sure beats having cash sitting on the sidelines, where it’s doing absolutely nothing!
Not only has the past year been an amazing time to be an options trader, but with many lending institutions falling over like dominoes, those who viewed the stock market as being “too risky” during this time have, unfortunately, learned the hard way that there are no guarantees even when you’re not invested.
BANKS, SAFETY NO LONGER SYNONYMOUS
For a lot of people, $100,000 might seem like a big chunk of change, but imagine if you went to bed with millions in the bank and awoke to only a hundred grand.
Unfortunately, in this crazy market, this scenario is becoming all-too-common. With the Dow’s (DJI) strong swings, many investors are feeling the sting from paper losses. But what about when it’s “real” money (i.e., cash that you might have pulled out of the markets or otherwise spent a lifetime earning and saving) that was supposedly safe in your lending institution?
I touched on this subject, but I think it bears a more in-depth look.
ANOTHER BANK IS ‘DUST IN THE WIND’
The Federal Deposit Insurance Corporation (FDIC) seized the assets of Columbian Bank and Trust of Topeka, Kan., in August, leaving many customers and investors wondering whether their lending institution of choice is next.
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Also on their minds: Is there a way to get the FDIC to insure bank deposits for more than the $100,000?
When former Federal Reserve Vice Chairman Alan Blinder was recently asked how many more bank failures we’re going to see, he replied “Probably dozens, if not scores.”
So far this year, there have been nine bank failures and, because no advance notice is given to the public when a financial institution is closed, this can happen to your bank overnight.
In the case of the most recent victim, the nine branches of the Columbian Bank and Trust of Topeka reopened under the direction of another local bank. Of the Columbian Bank and Trust’s $752 million, the bank held $46 million in uninsured deposits across approximately 610 accounts that potentially exceeded the insurance limits.
Their customers thought everything was safe and that nothing would go wrong, yet they found themselves literally locked out during bank hours with empty pockets, looking as though they were window-shopping for withdrawals.
Don’t let this happen to you.
Even if you have a perfect credit score and you have enough in the bank to make five years’ worth of mortgage payments, your money is NOT safe unless you take action today!
And even if I can’t help you today, maybe I can help someone to whom you forward this article, and you just might be able to save somebody else hundreds of thousands, or even millions, of dollars.
I can show you how to avoid one of the worst scenarios — your bank and deposits evaporating.
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THE AMERICAN NIGHTMARE
I want to introduce you to Bob O’Shea, a 50-year-old ex-retiree from New York City. He started an entertainment company with only $50 in the bank when he was 20 years old, and built the business brick-by-brick through good economies and bad.
Over 30 years, he dealt with hundreds of employees — some good relationships and some awful. Through blood, sweat, tears and endless sacrifice, he built a solid company. At the end of his long ride, another company offered to buy him out for $80 million in cash. Bob still owned 60% of it, so his take was $48 million.
That’s what I call the American dream.
In this economy, retirement and family time sounded just lovely, so he sold without blinking! His attorneys settled the deal and wired $48 million to his bank account. What could go wrong?
As he was driving his 12-year-old Buick home after closing the deal, Bob’s mind was racing. He thought to himself: “Should I stick the cash in the stock market? Bonds? Commodities are doing pretty well lately. I wonder what gold’s trading at these days?”
Then he slowed the car down, strapped on his seatbelt and checked his side- and rearview mirrors.
“Let’s calm down,” he thought to himself. “There’s no need to be risky here since I can probably make a couple million a year just on the interest. Let’s be smart and just keep the cash in the bank for a few months where it’s safe, and then we’ll decide what to do with it.”
He drove past his bank, which I’ll call “ShmindyShmac Bank.”
“Ah, there it is. I should definitely go negotiate a better interest rate next week,” Bob thought.
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NO HAPPY ENDING IN SIGHT
Fast-forward to a beautiful summer morning in late August 2008. While you were probably eating breakfast, Bob O’Shea was sleeping in. Finally, after 30 years of working, he’d sure earned it.
He woke up and turned on the TV. As he was starting his day, he loved closing his eyes while he listed to his favorite news anchor, Maria Bartiromo, as she’d talk about the markets.
Eyes closed, he listened to her talk until he heard the words that sent shivers down his spine:
“ShmindyShmac Bank, which once employed 10,000 employees, fell prey to a classic run on the bank. This institution failed today due to a liquidity crisis. Although this institution was already in distress, the deposit run pushed ShmindyShmac Bank over the edge. ShmindyShmac Bank is now the third-largest financial institution failure in U.S. history!”
He fell out of bed, heart racing. Bob’s anxiety level skyrocketed as Maria went on:
“Regulators said deposits were safe and insured by the FDIC …”
So, Bob started thanking his stars.
Then Maria continued, “…up to $100,000. So again, as long as your deposits are $100,000 or less, they are fully insured by the FDIC and you have nothing to worry about.”
You can imagine the expletives that came out of Bob’s mouth.
The epilogue to this story is that the FDIC took the bank over, retained the assets and sold them. So Bob has to wait for the FDIC to find out how much the bank’s assets are really worth, and then sell off the bank’s assets, if possible. Then, with any luck, they’ll return part of his deposits depending upon what they were able to recover.
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LEARN FROM BOB’S UNEXPECTED LESSON
You don’t have to let Bob’s nightmare hurt your fairy tale.
If you have more than $100,000 in deposits, you absolutely must read the following to keep your deposits from disappearing:
You can actually have your deposits insured by the FDIC for up to $50 million.
Why isn’t this common knowledge? Well, if I were the FDIC, I certainly wouldn’t be advertising it! Not in this market, where many more bank failures are widely expected.
It seems the banks don’t want to you to know about it, either, because they must pay a fee for each customer who elects to use this resource (though there is no additional charge to customers).
A contact of mine at FDIC gave me several pointers on how to maximize your deposit insurance, and I highly recommend you forward this to as many people as possible before it’s too late.
Why should you, or someone you care about, literally have to pay — with your life savings — for millions of people with bad credit and a ton of debt who have to foreclose on their homes? Because that is exactly what’s happening.
What if your bank failure puts you in the position where you then can’t pay your mortgage? Does that sound fair?
2 WAYS TO PROTECT YOUR NEST EGG
There are a few ways to insure your deposits for much more than $100,000, other than banking at multiple institutions. Two of the best ways are:
1. Using something called the Promontory Interfinancial Network’s CDARS (Certificate of Deposit Account Registry Service), which allow you to insure deposits up to $50 million.
2) Arranging your account structures into different “account categories” so the FDIC insures each account category separately, thus significantly increasing the amount insured.
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MAKE SURE YOUR MONEY TREE IS MADE OF CDARS
First I’ll explain how CDARS accounts are FDIC-insured up to $50 million.
The Certificate of Deposit Account Registry Service, operated by the Promontory Interfinancial Network, takes your deposits and spreads the risk around numerous banks. In other words, if you had $1 million and you know the FDIC insures up to $100,000, you might consider opening 10 savings accounts at 10 separate banks. But CDARS does that legwork for you.
Your deposits get broken down into packets below $100,000 (below, so the interest you earn doesn’t put you over the hundred-grand limit), and then distributed between several banks around the country.
But you don’t have to open any additional accounts, and you still get one bank statement, one interest rate and one 1099, all from your home bank. Again, there’s no extra charge to you, the customer, but there is a charge to the bank.
Just like your typical CD (certificate of deposit), there are a variety of maturities. You can select from maturities ranging from four weeks to five years.
So anyone with more than $100,000 in the bank should ask their bank if they are a member of the Promontory Interfinancial Network. Better than 2,200 banks are members so it’s likely that your bank is on that list.
What if your bank isn’t a member? What if you don’t want to use CDARS or you don’t need that much protection? Maybe you’re slightly over the $100,000 limit the FDIC offers?
DIFFERENT IS GOOD
I noticed on the CDARS Web site it says “ALMOST anyone can benefit from CDARS.” So just in case you aren’t one of “almost everyone,” you can finagle your account structures into different “account categories.”
Here are a few facts that you should understand to help you max out your FDIC insurance.
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The first three paragraphs come directly from the FDIC Web site:
“The FDIC insures deposits in most banks and savings associations located in the United States. The FDIC protects depositors against the loss of their deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.
“The basic insurance amount is $100,000 per depositor, per insured bank except for owners of certain retirement accounts, which are insured up to $250,000 per owner, per insured bank.
“Deposits maintained in different categories of legal ownership at the same bank can be separately insured. Therefore, it is possible to have deposits of more than $100,000 at one insured bank and still be fully insured.”
There are eight different account categories:
- Single Accounts
- Certain Retirement Accounts
- Joint Accounts
- Revocable Trust Accounts
- Irrevocable Trust Accounts
- Employee Benefit Plan Accounts
- Corporation/Partnership/Unincorporated Association Accounts
- Government Accounts
WAYS TO MAXIMIZE DEPOSITS
First, understand that each account category has its own FDIC coverage. For example:
A “single account” is one account category that includes deposits in checking, Negotiable Order of Withdrawal (NOW) accounts, savings accounts, money market deposit accounts and time deposits such as certificates of deposit (CDs).
A “joint account” is another account category.
So, one way to get FDIC insurance of up to $400,000 between you and your spouse is to each have your own individual account, and to also have a joint account for a total of three accounts.
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Your individual account is insured up to $100,000, your spouse’s individual account is insured up to $100,000 and your joint account is insured up to $200,000 in total because each individual named on the joint account is insured up to $100,000 in this account category.
Then you have certain retirement accounts such as the popular Individual Retirement Account (IRA). This category is separately insured by the FDIC up to $250,000. So the insurance is starting to add up.
(So far it’s as much as $850,000 per married couple and $450,000 for a single person, depending on if they have a joint account with someone or not.)
ADDED BENEFITS
Revocable and irrevocable trust accounts are two more separate categories. The FDIC insures $100,000 in deposits per beneficiary!
So if you have a person (or people) in mind whom you wouldn’t mind adding as beneficiaries of your trust, you will be adding an extra $100,000 in deposit insurance per lucky person.
A beneficiary can be a spouse, child, grandparent, sibling, adopted child, grandchild or stepchild. There are likely other options, so it won’t take much creativity to maximize the insured amount with this strategy.
You can consider doing this as either a temporary measure for insurance purposes, or permanently.
Whatever your plan or goal, few things are more important right this minute than making sure you don’t end up paying for other peoples’ mistakes.
Of course, now is a great time to start trading options, if you haven’t already, or to start trading them more. There’s no easier way to make up for lost profits, and generate lots of new ones, than to double or triple your money in one, inexpensive trade!
Chris Rowe is the Chief Investment Officer for Tycoon Publishing’s The Trend Rider. To learn more about him, click here to read his bio.
