Jon Bon’s Money

No, it is not.

            Well on second thought, your bank might go out of business, be merged with another bank or sold off piece by piece. What are not affected are your deposits in a failed bank. The Federal Insurance Deposit Corporation (FDIC) will insure any and all deposits made within a bank up to $100,000. So as long as your deposits in your bank are under $100,000 then you are 100% protected from any type of bank failure.

            The recent failure of IndyMac was a great example of a self-fulfilling prophecy.  Due to the media and politicians putting banks and IndyMac in the negative news, it managed to freak everyone out and literally have a 1929 style “run” on the bank. This of course did in fact make the bank insolvent and require it to be bailed out by the FDIC. Whether or not that bank would have survived without the run is unclear, but what is clear is that IndyMac could not survive with all of its depositors withdrawing funds at the same time.

            So friends, largely ignore any information you hear about the earnings of your bank. (Unless you own stock in or work for that bank!)

            Its has been reported that The Federal Home Loan Mortgage Corporation AKA: Freddy Mac and The Federal National Mortgage Association AKA: Fannie Mae are on the verge of insolvency which would either lead to a massive government bailout (bad) or bankruptcy (worse).

            These are Government Sponsored Enterprises’ (GSE) that were chartered by the government, but in no way are backed by them. The purpose of these GSE’s is to make it easier and cheaper for average JonBon’s like you and me to get a home loan.

            Without Fannie and Freddy Banks make loans to individuals to purchase a home. Now if the bank had to wait for you to pay them back completely then it would take up to 30 years! So therefore this bank could only make one loan with those funds every 30 years. It would take a ton of banks and trillions of dollars to operate that way.

            What Fannie and Freddy do is purchase the rights to that future cash flow from the banks. So the banks then sell the loans, get back the cash they lent and are free to make more loans. Fannie and Freddy don’t sit there and hold onto these trillions of dollars in loans. They package them up into manageable pieces and then sell them on the open market for banks, investment houses or for anyone else to buy.

            Fannie and Freddy make the systems much more efficient and cost effective. They are suffering along with everyone else from the billions in sub-prime loans that they purchased from banks. When a loan defaults, they are often left holding the bag.

            This is a story that probably will affect all of us even if you don’t have a mortgage, so stay tuned.