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Safeguard your nest egg.


The nation is in the process of dealing with its worst financial debacle--the growing national deficit, now estimated at $2 trillion--while attempting to avoid an even worse disaster with the banks.

Each person needs to be knowledgeable of the emerging banking-related problems surrounding the Resolution Trust Corp. (RTC) and the Federal Deposit Insurance Corp. (FDIC). They also need to know how they can best protect their financial assets.

A few fundamental facts are required about where we are now and where we may be headed in order to understand the sequence of events and to best protect ourselves in the future. * The RTC was formed in 1989 to manage the S&L crisis and bailout. The RTC now has approximately 5,400 employees, including 500 lawyers. The RTC also has hired numerous outside attorneys and valuation experts to help unravel the paper trail of financial failure. It is estimated by Bill Seidman, head of the RTC and the FDIC, that it will take at last 10 years to dispose of the backlog of insolvent S&Ls. * The RTC has paid out (using your taxes) about $100 billion thus far to make good on deposit insurance at more than 500 failed S&Ls (there were approximately 2,500 S&Ls in total). Estimated losses from S&L failures now total approximately $600 billion and climbing. That amounts to approximately $2,000 for every man, woman, and child in the U.S. * The FDIC, with about 19,500 member banks, insures about 30 percent of the nation's financial deposits. At the end of World War II, the FDIC banks controlled approximately twice that percentage. * The FDIC, which backs $2 trillion in deposits, has less than $9 billion remaining, or 40 cents per $100 of deposits. * In the last five years more banks have gone under than in the previous 50 years. These failures include a number of large banks, such as the Bank of New England, as well as other smaller banks across the U.S. * It is estimated by various government sources that approximately 374 banks currently have inadequate finances and could fail momentarily. * Seidman is requesting emergency authority to borrow from the Federal Reserve to bring the FDIC insurance fund up to $70 billion.

In view of this unfolding national financial crisis, there are some simple steps a depositor can take to protect his or her financial assets.

A. Review your bank's current audited financial statements for safety. Ask your bank, savings-and-loan association, money-market fund, etc. (referred to as "bank" in this article) to provide you with its audited financial statements. Review the statements, including the notes, and determine that your bank is in a financially strong position with a "clean" audit opinion. Specifically look for signs of growing real-estate losses and a dangerous debt-to-equity ratio. If reading financial statements is not your cup of tea, consult your accountant or financial advisor. Yes, it is true that many of the audited statements of the failed S&Ls were misleading, so look for substantial levels of financial safety in your review as added comfort.

B. Watch the news and consult with your accountant or financial advisor about changes in banking laws and determine if the changes have or will impact your banking security. For example, current levels of deposit insurance for $100,000 per individual per bank will undoubtedly be retained. Large depositors should consider the protection of having a number of accounts containing the $100,000 insured limit at various credit-worthy institutions in order to provide for federal insurance of all deposits.

C. Determine the status of your retirement funds held by banks. Cash and cash-equivalent assets of up to $100,000 in a retirement account are federally insured in FDIC banks. You should request a current valuation of your retirement account relative to the $100,000 insurance level and consider how much of your retirement assets are sequestered at any one bank. Incidentally, if your retirement assets are held by an insurance company, it is a very good idea to review its status with your financial advisor.

D. If banks become involved in other financial services, as proposed by the Bush administration, do not assume that funds held on account or invested relative to those services are federally insured. Bank-reform legislation is pending which would allow banks to enter into non-banking services, such as insurance and securities brokerage. Currently, banks are prohibited from offering such services. Funds held for investment in these activities, however, may not be federally insured (depending on legislation). By not federally insuring these funds, lawmakers hope to avoid another federal insurance crisis.

Some unfortunate depositors and all taxpayers are, and will, suffer financially because of the S&L crisis. There is little doubt in this writer's opinion that numerous banks are also on the verge of failure and that an FDIC bailout will involve the poor taxpayer once again. Only the unwary and careless depositor, however, will lose his or her nest egg.

The banking reforms now being proposed will impact almost every person in the U.S. It is very important to stay on top of these changes and their potential impact on your savings. Additionally, it may be time to gain an updated understanding of the financial status of your bank. If your bank is financially sound, it should welcome your interest.

Richard Houlihan, CPA and ASA, is an accredited senior appraiser with Houlihan Dorton Jones Nicolatus & Stuart Inc.
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Title Annotation:advice for investors concerned about problems plaguing the Resolution Trust Corp. and the Federal Deposit Insurance Corp.
Author:Houlihan, Richard
Publication:Utah Business
Date:Jul 1, 1991
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