What If The Banks Are Nationalized?

February 23, 2009

| Money Rates Columnist

During the past week a new discussion has begun to emerge in Washington, the matter of nationalizing banks.

This is a big deal, symbolically and in other ways. If you have a CD, money market account, savings, or IRA you need to keep an eye on this conversation.

As this is written many bank stocks have taken a beating. Citigroup, as one example, closed below $2 a share on Friday. The market cap for the entire company was $10.63 billion. This is a company with more than $2 trillion in assets and deposits of more than $270 billion.

Uncle Sam has tried to create a floor under the banking system by buying tainted assets, guaranteeing securities and purchasing nonvoting preferred stock. The result so far has been both good and bad: The good part is that the financial system has not collapsed. The bad part is that lending remains insufficient and tight credit is slowing down the economy at a time when less economic activity can hardly be seen as helpful.

If you have a federally-insured CD it doesn't really matter if your lender is solvent or not -- the government will make good on the securities and accounts it covers. However, not all accounts and amounts are covered. Use these links for specifics:

FDIC -- Insuring Your Deposits

What SIPC Covers

The problem, of course, is that the government does not protect against all loss. In practice, the protection levels are high enough to cover all losses from most account holders -- but NOT high enough to cover all losses from all account holders. If you're in this second category you need to look carefully at where you keep your money.

What's going on with the Madoff fiasco is a good example: There is protection for some account holders for as much as $500,000. But the account holders who invested with Madoff indirectly may not be covered.

If you want to see a live example of how account protection can work, take a look at the Madoff Trustee site. The SIPC has moved with great speed to figure out who owes what to whom, but this is not going to be an easy process. The latest news reports allege that Mr. Madoff saved a lot of time and effort during the past 13 years by not actually investing any client money, hardly a shrewd strategy given how the market values increased most of that time. As well, there are some 7,000 boxes of documents which need to be sorted.

Looking at the Madoff situation it mow appears that most if not all investors will have losses, some investors will get back at least $500,000 and -- most amazingly -- some investors may be sued to get back money paid to them by Madoff during the past few years, a so-called "claw back."

In everything but name, major banks have already been nationalized. The government is determining dividend policies (1 cent per quarter per share), executive compensation and now loan modification efforts. While all of this has been going on not a dime in covered accounts and in covered amounts has been lost.

As the expression goes, so far, so good....

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