Invisible Runs on Banks

Updated: Sept 27, 2008

Sometimes it's what goes on behind the scenes that can have most disastrous effects.

As I write this the FDIC is preparing a list of banks they will soon be forced to seize and close. Hundreds of banks will end up on this list. Key leaders in the financial community are predicting widespread bank failures in the year ahead.

But where are the runs on banks? We've only had a half dozen such runs so far and chances are if you live outside New York City, you haven't had any banking problems - yet.

Here's what's going on behind the scenes. The FDIC insures bank deposits up to a limit of $100,000 per depositor. While this covers the vast majority of us, this doesn't cover rich people. And they are reacting by pulling out their funds over that limit.

Tens of billions are changing hands as the wealthy extract their funds quietly and invest them in the safest store of wealth there is - U.S. treasury bonds. And this despite the bond yields tumbling to near zero levels.

Those in the know expect the government to stem this tsunami of cash by simply raising the FDIC protection limit to say - half a million. Problem is, the FDIC fund contains only 1% of insured deposits.

Throughout the months ahead the government will be bailing out various financial firms but in each case the emphasis will be on avoiding the depletion of FDIC funds. They know what's coming and they know they badly need to protect those funds as long as possible.

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