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No Checks. No Debit Cards. No Savings

posted 8/6/2008 2:56:23 PM |
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  docvegas

Imagine waking up on a sunny Saturday morning to find you can't use your debit card to buy groceries or pay for gas any longer? You can't withdraw a single dollar from the ATM. And your bank froze your credit cards.

Then you discover that every check you wrote in the past week has bounced. And, you receive a call saying that your retirement assets are frozen. The kicker is that you had over US$1 million dollars in your account.

You try to call your bank for answers, but they won't help you.

I know this story sounds like I've pulled it right out of the Great Depression. I've got news for you...this story is very real. It all happened last month to a US$2.1 BILLION bank in a little community in Bentonville, Arkansas.

How a Bank "Suddenly" Goes Under
in the 21st Century
It was a very organized attack. On May 9th, the accountants snuck in the back door that Friday night after 5:00pm once the bank's doors had closed. Little did anyone know the doors were closing for good...

And under the cover of darkness, over a hundred FDIC accountants began to systematically dismantle ANB financial headquarters - the venerable US$2.1 Billion institution that had been in business just hours before.

In short, FDIC officials were there to pick up the pieces because ANB was about to become the third bank to FAIL here in the United States in just the last six months. The fourth-largest bank in Arkansas was about to become yet another sub-prime casualty that choked on their own bad loans and investments.

The unlucky customers of ANB received nothing more than a letter that stated nothing of the bank failure, but rather introduced the "new" bank - Pulaski Bank.

Yet, I am sure most customers figured out their bank had gone south long before the formal letter arrived. As of 5:01 PM on May 9th, every single account at ANB was frozen. Money market accounts to trust assets to basic checking accounts...

What FDIC Insurance Really Means
If Your Bank Goes Under
When you hear your account is "FDIC insured," do you really know what it means? In short, it means the Federal Deposit Insurance Corp. will reimburse you for up to US$100,000 for any one account you hold in your name.

If you have a joint account, then both account holders are insured up to US$100,000. You also can secure US$100,000 for each beneficiary in certain accounts (payable on death). (For full FDIC rules see FDIC's Guide to Deposit Insurance Coverage.)

Does this insurance help? Absolutely. But when you have an account worth more than US$100,000...well, that's how you can lose money if your bank goes under.

Also, these days most respectable businesses make well over US$100,000 a year, so that limit is fairly easy to reach. And when accountants poured over ANB's books, they discovered 647 accounts that exceeded that limit. That equaled US$39.2 million in uninsured funds.

FDIC representatives, who I believe must hate their jobs on a regular basis, had to call these unfortunate account holders and tell them what they lost. One ANB client lost US$1.4 million. Overnight. With no warning. And as for the rest...well historically, uninsured deposits recoup 65 cents on the dollar. Plus, it can take years to get your money back.

A shocked ANB client said to me: "It's like [your money] doesn't belong to you anymore...it's theirs."

Make Sure this Doesn't Happen to You
As we've often said over the last 10 years in this business, you can protect yourself from such massive faults in the U.S. banking system. And one of the easiest ways to do that is to spread out your wealth across several accounts - just in case a bank goes insolvent like ANB did.

Another valuable option is to diversify by moving a portion of your wealth offshore. By banking offshore, you gain an extra layer of protection because historically, offshore private banks have a higher liquidity than domestic banks. And in places like Switzerland and Austria, banks have stayed solvent for hundreds of years.

Jack Pugsley, a hard money advocate and our Chairman, has a few suggestions about how to protect yourself from the next banking calamity including:

1. Check out your bank's credit rating. Check out the collateral backing up the loan. In the case of banks, you can do this by getting regular credit reports on any U.S. bank from Veribanc.

2. Understand the rules, so you know what you're getting into. You can check out FDIC rules to find out what types of accounts are covered and how much. Click here for the rules.

3. If you decide to bank offshore, treat your offshore banker like a domestic banker. Check their credit rating and collateral. Sound foreign banks also protect against the possibility of the U.S. government declaring a bank holiday, or freezing bank deposits, as Roosevelt did in 1933. It could happen if economic conditions get really bad. Other countries (like Argentina) have done this more recently. So choose the strongest currencies and countries.

4. Above all, keep in mind that bank deposits are loans in a currency. Right now, U.S. banks are paying less than the inflation rate for deposits, and the interest is taxable. So depositors are losing purchasing power, and if price inflation heats up, which it will, the losses could be substantial.

5. Diversify, diversify, diversify...between banks, between currencies, between countries, and between assets (loans, equities, tangibles).

Above all, look at a bank deposit for what it is, a loan to the bank. Treat the banker like you would treat anyone who asks you for a loan. You want to know whether the borrower will be able to repay you if he gets into trouble.

You never want to wake up one day and find yourself without a bank. But if it happens, a few precautions can help you protect what's yours.



P.S. Threats to your hard earned wealth lurk behind every corner. From unrealistic FDIC insurance limits to burdensome taxes, frivolous lawsuits to federal debt, a declining dollar to a declining stock market - anyone with any kind of assets faces some very real threats to their financial well-being. .


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