Leading up to the banking crisis we had a few years ago, it seemed to me that a bunch of banks went bankrupt. I'm talking before the bailouts happened. What happened to them, and to the people who had money in the bank? Do they get a payout from the FDIC? Does the FDIC step in an assume that bank's debts?


Did any private individual actually have their bank deposits just disappear during that time, because the bank went belly up and couldn't pay them back?

I hear the FDIC has a limit on how much they insure an individual - does this mean that people who had less than that amount got all their money, but people who had more lost the remainder?


I'm asking because there seems to be a lot of attention on Bank of America right now, and a handful of people are pulling their money out.

I don't have an account with them, and never would - not since they charged my girlfriend something like $400 in fine-print fees. But I know people who do have accounts with BoA. Might these withdrawals spiral out of control, as more people pull their money out?

Part of what happened leading up to the bank bailout was that the largest banks bought out or merged with several smaller banks. They also bought up a number of other financial institutions to expand their financial services. Basically, the idea was to become set up so that a customer could take care of all his/her financial transactions in one place, whether it was investment, retirement planning, banking, or whatever. CitiGroup, J.P. Morgan/Chase, Wells Fargo, and Bank of America were all among this group, as were others I don't remember of the top of my head. Point is, each of the banks involved in this were also the same big banks who received bailout money.

Mergers always happen during a bad economy. However, the banks weren't the only ones who did this and then received a bailout. American auto companies did exactly the same thing. It's a form of rape-and-pillage economics: buy up competitors to take advantage of their assets. When they do so, they spend huge amounts of money, and take on whatever debts and obligations incurred prior to the merge.

In the case of the banks, there was a flurry of mergers because of passage of the Gramm-Leach-Bliley Act of 1999 which deregulated financial mergers. The passage of the act is rather suspect for one reason: CitiCorp bought out Travelers Group in 1998 in what was then an illegal merger due to the Glass–Steagall Act and the Bank Holding Company Act of 1956. CitiCorp (who changed their name to CitiGroup) was given a 2-year forbearance for the expressed reason of forcing a change in the existing laws regarding financial institutions. The Gramm-Leach-Bliley Act, passed one year later, was the direct result. So, in effect, CitiCorp was not punished for attempting an illegal merger, but was instead rewarded with a form of deregulation. When the dust settled, the rapid expansion sparked by this had placed several banks deep in debt. So they were rewarded a second time for their actions by a government bailout.

Smaller banks which failed were a separate issue from what happened to the big banks. However, they may have been affected by the big banks' rush to consolidate financial services through a loss of business. Also, several smaller banks tend to invest heavily in real estate. So they may have been hit hard by the housing crisis as well.

BoA has been losing public confidence for at least 6 years now because of their policies and practices. Nothing ever seems enough for them - they keep passing on the cost of business to their customers rather than take responsibility for their own mismanagement. I generally don't like big banks - I stay local whenever I can (which is becoming increasingly difficult). BoA has tried to get my business for years, and I have refused them every time. If there is only one bank in this country that deserves to go belly up, Bank of America is the one I would name first.

The limit of FDIC protection is 10,000 dollars. The FDIC doesn't do anything for the banks themselves-only depositors. If your bank goes belly-up, your money also evaporates (except for that covered by the FDIC, and there's no guarantee that would work in a catastrophic collapse). If every member of a bank withdrew their funds, it would either go bankrupt or beg for a bailout. Banks in this country use fractional reserve banking. Books that go into detail on this include "Mystery of Banking" by Rothbard and "Meltdown" by Thomas Woods.

Usually individual depositors are insured by the FDIC

from the bankrate article on the subject:

"The FDIC is an independent agency of the federal government. It is charged with insuring deposits in banks and thrift institutions up to $100,000 per depositor in individual accounts and $250,000 in retirement accounts. Deposits held in different categories of ownership may be insured separately."

Read more: What happens when a bank fails? http://www.bankrate.com/finance/checking/what-happens-when-a-bank-fails.aspx#ixzz1avxgqbDP

BoA is not really in danger of going under. Buffett would never
have invested in it if it was. It can be liquidated at a premium
to it's current trading value so it is actually likely a good
investment if you have lots of money, some balls, and a 5 or 10
year timeframe to reap the rewards.

So no need for nervous nellies to pull deposits.

But also no real strong reason to bank with them.
A bank like BoA which is under pressure is likely
to cut costs and services. So if it is service you
want then you might try another bank.

No cause for alarm though the way I see it. However it is always
prudent to make sure you do not have so much in any one bank
deposit that you are not covered by the FDIC minimums. There are
usually better places to put your savings.