How To Protect Money In a Financial Crisis
Before I begin, I want to be clear that I am not a financial advisor and therefore this should not be construed as financial advice. What follows is freely available information that I have assembled to inform readers.
Recently I opened a new account at Fidelity for a company I had just started. What I noticed immediately is that the new account automatically defaulted to a FDIC sweep cash management facility without even asking my preference. What I had specifically wanted was a government money market account invested in Treasury Marketable Securities aka. t-bills. So I changed the cash management facility manually. This is happening every day across every bank and broker. Why? Because most people have been led to believe that FDIC insured deposits are the safest place to park money, but the truth is that banks make A LOT more money when funds are deposited in FDIC insured accounts versus invested in Treasuries and corporate money markets. An FDIC account means the bank has full discretion as to how YOUR money is lent or invested. And yet, the FDIC insurance fund only has enough funds to cover ~1% of total U.S. deposits. Yes, you read that right.
Nevertheless, 99% of all U.S. deposit accounts are deemed to be FDIC insured merely because they fall under the $250k limit. Unfortunately, currently ~43% of all deposits are NOT insured because the largest 1% of accounts are over $250,000 many by a staggering amount. Which is what caused the bank run in March 2023. Therefore, ironically despite the majority of accounts being theoretically "protected" from insolvency, the FDIC itself is NOT protected from insolvency. Below I will delve into the various aspects of this time bomb that I believe make the system far more at risk of a massive banking crisis than it was in 2008. In a nutshell I believe that the locus of crisis will be the FDIC itself which is universally considered a safe haven for funds.
But don't take my word for it here is what the FDIC said itself in May 2023 following the bank run of March 2023:
"Trends in uninsured deposits have increased the exposure of the banking system to bank runs. At its peak in 2021, the proportion of uninsured deposits in the banking system was 46.6 percent, higher than at any time since 1949. Uninsured deposits are held in a small share of accounts but can be a large proportion of banks’ funding, particularly among the largest 10 percent and largest 1 percent of banks by asset size. Large concentrations of uninsured deposits, or other short-term demandable liabilities, increase the potential for bank runs and can threaten financial stability. Uninsured depositor runs triggered the failures of Silicon Valley Bank and Signature Bank in March 2023, respectively the second and third largest bank failures in the FDIC’s history at the time"
The report goes on to lay out three potential options for reforming the FDIC to make it more solvent. As of this writing NONE of the reforms have been adopted by Congress. Which means that the current "limited" ($250k) coverage model remains in place and the system remains at high risk of uninsured bank run.
I will divide the body of this post into sections so the reader can easily find specific information. If you want to jump directly to how to use TreasuryDirect.gov those instructions are at the end of this post:
1] Bank Run 2023
Back in March 2023, several U.S. banks and at least one overseas bank (Credit Suisse) failed very quickly in succession. The underlying causes of that bank run have yet to be addressed.
Above we noted that uninsured deposits played a role in that bank run and that risk remains unaddressed. However, there were other contributing factors that came into play. One of which is briefly mentioned by the FDIC report at this line in the executive summary:
"By issuing demandable deposits and lending long term, banks are subject to runs"
During the pandemic, banks took in massive amounts of new money due to the various pandemic stimulus programs. They didn't know what to do with it, but all bank executives believed that interest rates would remain low for the foreseeable future, so they invested in long-term Treasury bonds. Which created what's known as a duration mismatch - demand deposits invested in long-term bonds. In 2022 when the Fed raised rates 17 times in a row, deja vu of 2007, banks' treasury bond portfolios collapsed in value as indicated in the chart below:
The data in the chart below is taken from the September 2024 FDIC Quarterly Banking Profile Report:
See Chart 7: Unrealized Gains (Losses) From Investment Securities
Here is my version of that same chart data shown below a chart of Regional Bank stocks. What we notice is that the amount of unrealized losses has only improved slightly since 2023 and still remains far larger than it was in 2008.
What happened in the case of Silicon Valley bank is that they were ALREADY insolvent before the bank run took place, but bank regulators had given them a pass on their negative equity condition. There are at least 190 more banks in this same situation:
"The recent rise in interest rates by the Federal Reserve has increased the fragility of the U.S. banking system to the point that a substantial number of institutions are at risk of failing should there be a run on these banks by uninsured depositors"
2] The 2008 Scenario
The comparison of what happened in 2023 versus 2008 should be an eye opening lesson for everyone. Back in 2008, the first banks that failed were smaller institutions that were quickly sold to larger banks and brokers. One by one the dominoes fell but depositors got bailed out 100 cents on the dollar which is why no one panicked. However by September 2008 the FDIC realized they were soon going to run out of money. So they let Lehman Brothers collapse outright without any form of organized bailout. That led to a systemic panic because every depositor and investor then realized from that point forward THEY would be taking the losses. To stem the panic the FDIC finally invoked the SRE "Systemic Risk Exception" to ensure 100% bailout of the next dominoes to fall which were Citigroup, Wachovia, and Bank of America. In order to do so, the FDIC was 100% backstopped by a special vote in Congress aka. "TARP". Without that vote, the FDIC would have been insolvent.
Compare that set of events to March 2023 wherein the very first bank that failed - Silicon Valley Bank - the FDIC immediately invoked the "Systemic Risk Exception" (SRE) to ensure 100% bailout which included uninsured deposits. A bailout that is extremely costly. They did the same for the next bank that failed, Signature Bank. Which is why they put out the report above in May 2023. Because they are already at the point of requiring a Congressional bailout BEFORE the next bank run even begins.
Unknowingly, a gargantuan $8.5 trillion of uninsured deposits are already at the vagaries of Congress.
It's a ticking time bomb.
3] Other Options For Protecting Money
For those who can't access TreasuryDirect.gov or want a simpler solution, below are the next best alternative ideas for protecting money.
The second best option is to merely invest your cash at a brokerage firm in either a government money market fund or buy t-bills and bonds directly through your broker. This option is also available for many 401k investors assuming they have a government money market investment option or can create a self-directed account. One of the benefits of buying bills and bonds with a broker is that they can be traded prior to maturity whereas bills and bonds bought at TreasuryDirect. gov must be held to maturity. The downside of this approach is that many brokers have morphed into banks which puts them at risk of a bank run. The term "FDIC sweep" is a warning sign that your broker may be making bad decisions with that money. Such as Schwab which got caught up in the banking crisis in 2023.
The third option is to merely spread your money around at multiple banks - having less than $250k at each bank, to make sure you remain 100% insured. Not a good option for a CFO managing $5 million which would require 20 bank accounts. Those were the people who collapsed Silicon Valley bank literally overnight.
And if you are really paranoid, you buy gold knowing that it could collapse in value during the deflationary phase of events.
I will be buying gold AFTER the global asset collapse, not before. That was another lesson from 2008.
4] How to Use Treasury Direct
Step 1] Create an account
Step 2] Link your bank account
Click the "ManageDirect" menu heading at the top
Step 3] Select Treasury Marketable Securities
Click the "BuyDirect" menu heading at the top and then select the duration you want to buy short-term t-bills (1 year or less), t-notes (2 years to 10 years), or t-bonds (10+):
Click Submit
At this next screen below you see a list of maturities with auction dates.
Pick the maturity you want and the closest auction date to get invested as soon as possible.
You are basically saying buy t-bills at the auction price on this date. You are not participating in the auction, you are merely buying at whatever price is set that day. It's called a "non-competitive" bid. You get whatever price the big money sets on that date, which is the same price as everyone else gets.
Scroll down to enter the $ amount.
And then click Submit at the bottom.
It's important to note that the funds can't be sold prior to maturity, unless you transfer them to your broker. I have read online that process can take weeks.
There is also a difference between how t-bills and t-notes/bonds work.
With a t-bill (52 weeks or less), if you invest $100,000 at 4% for one year, TreasuryDirect will withdraw $96,000 from your bank account on the auction date. You get to keep the $4,000 interest up front. At the end of the year, you get $100k back. The interest rate is implied by the $4k difference in present value and future value.
Whereas with a note or bond they take the full amount $100k up front and they remit (4% / 12) per month in interest. And at the end you get the $100k back.
To view your holdings go to:
