Does FDIC Cover Brokered Deposits?

In today’s banking industry, looking carefully before you leap is an important part of any decision-making process, especially where your money is involved. You might assume that any deposit that you make in a United States banking institution is FDIC insured. Nothing could be further from the truth! Assuming that the FDIC is automatically going to cover your loss when investing in banking instruments could prove to be a mistake. In any event, brokering a deposit in a failed bank is likely to result in a loss of access to your money.

Putting money into an FDIC-insured certificate of deposit called a brokered CD could seem like a no-brainer in the cash department. Some consumer investors have discovered hurdles with so-called brokered CDs issued through one distressed Arkansas bank. The third bank closed by the FDIC this year on May was ANB Financial in Bentonville, Arkansas.

ANB has been the largest U.S. bank closed so far this year. Pulaski Bank and Trust Co. in Little Rock assumed control of the bank’s locations and deposits were quickly insured. ANB Financial had a large amount of brokered deposits in the neighborhood of $1.6 billion. These brokered deposits were not part of the FDIC deal. Why?

Brokered CDs are not the same as an ordinary CD (certificate of deposit) opened directly through a local or out-of-state bank. Brokerage firms offer CDs, too. The deposit brokers often negotiate

Bankers Creating New Stock Exchange

Amidst concerns about rising trading costs in the London Stock Exchange and other European exchanges, investment banks are coming together to create a new system for trading in shares. The new system is to be owned by Citigroup, Morgan Stanley, Goldman Sachs, Merrill Lynch, UBS, Credit Suisse and Deutsche Bank.

Big investment banks are not one to rest on their laurels when it comes to formulating new ways to make money in today’s financial marketplace. The consortium of investment banks have joined hands to create a new European system for trading shares that they expect to rival Europe’s top stock exchanges. The bankers may bring the system online before a new European Union directive on trading in financial products comes into force next month. The new investment banking enterprise is expected to prosper in part because the cost of trading in the US is said to be 80 percent lower than in Europe.

More Funding Auctions in June

The Federal Reserve announced the continuation of its bank funding auctions as it continues to make a fresh batch of short-term cash loans available to still-squeezed bankers as part of an ongoing effort to ease stressed credit markets.

The Fed said it will conduct three auctions in June, with each one making $75 billion available in short-term cash loans, to help banks overcome credit problems so they will keep lending to customers. The magnitude of the problem continues unabated as the Federal Reserve increases the credit available. How much progress that banks are actually making with capital funding to wean themselves from Fed credit is a large question. The banking situation appears to be stagnated as the banking umbilical remains firmly in place. Will the Federal Reserve continue to uphold $75 billion auctions or will bankers see a decrease in funding in the near future?

Mortgage Vultures and Congress

In a recent hearing on mortgage servicing, Senators probed Countrywide Mortgage on exactly how mortgage servicers make their profits. Servicers earn revenue through a fee that is a percentage of the mortgage, float income from interest on temporarily-held funds, and through retained fees like late charges and other fees paid by borrowers.

Senator Charles Schumer described the addition of these fees as “piling on”. Mr. Schumer is convinced that a “vulture mentality” is developing among mortgage servicers as defaults rise. Senator Schumer called Steve Bailey of Countrywide to task for attempting to deny that mortgage servicers profit everyday from delinquent homeowners, even when borrowers and loan holders might benefit if the family retained its home, rather than struggle to pay an avalanche of default costs.

Paradox of Market Turmoil

World financial market turmoil has revealed two paradoxes. The first is that after several years of high profits the global banking sector was thought to be well capitalized, even bullet-proof. Actual capital buffers and provisioning in banking were much less robust than they had seemed. Everyone forgot to measure risk and looked at the profit. Little, if nothing has changed.

The second paradox is that elements of a massive liquidity freeze occurred in certain financial market segments (for example, the United States) within a context of overall excess dollar liquidity worldwide. In other words, because of bad bank securities and the risk of accepting them or trading value-for-value, bankers on a global scale began to refuse to trade with fellow bankers to protect themselves.

World bankers are looking at these arenas for salvation: risk management in financial institut- ions; the originate-to-distribute business model of the large banks; and the coordination of financial regulation and supervision across financial institutions, markets and national borders.

World bankers say that improvement in financial literacy can be made by realigning the incentives among the originators and other participants in the securitization chain through attention to detail.

The Truth About Interest Rates

Most economists, like most Americans, have cheered the rate cuts as medicine that hopefully will work and a reaction that might not do much harm. Interest-rate cuts do have a dark side.

It’s generally assumed that all things being equal, lower short-term interest rates are better. But this view is simplistic and arguably wrong. Lower rates are a help to people with credit card and margin debt, as long as the savings are passed along and don’t end up in banker’s pockets to help fund their adventurous position. Thanks to Mr. Bernanke and a reasonably cooperative Congress, many people facing resets on adjustable-rate mortgages will see less severe rate hikes. Lower rates are not an blessing for everyone. People with money in the bank or investments in Treasury bills and other short-term securities will see incomes reduced. Retirees and others on fixed incomes, such as pensions, lose out every day.

Don’t Be Spooked, Don’t Give Up

Federal Reserve chairman, Ben Bernanke, urged banks to prevent deeper damage to the economy by continuing to raise capital despite losses from the credit crisis. “Firms are hunkering down,” he told a conference in Chicago. “They have at least partially replaced the losses with new capital raising, but not entirely. They are being rather conservative in making new loans, which has implications for the broader economy.”

Mr Bernanke and the US Treasury secretary, Henry Paulson, have repeatedly said firms should keep increasing their funds, seeking to alleviate the impact of the credit crunch.

Raising investment capital is the only real hope