Froogal: Why we are GETTING RID OF FDIC-Insurance for Froogal users
Simple - now we can ALL earn more with close to zero added risk
Let me lead with - I get it.
You have learned to love the idea of FDIC insurance and will likely be upset by this decision.
The thought of $250,000 of your idle cash (earning absolutely terrible interest rates right now at Ally/Marcus/PersonalCapital/SoFi/BoA/Wells being locked in some old fashioned vault until you need it is attractive.
It was more attractive when it first started (post-great depression) and pretty attractive when the financial crisis hit ('08) because some people did in fact lose the chunk of their money that was not fully insured.
But times have changed, alternative options are limited, and your freedom is at risk.
Times have changed
A few major things have happened with regard to FDIC-insurance in the past 20 years.
A financial crisis hit.
The total insurance coverage got bumped to $250,000 (from $100,000).
Products were invented to get around the new (any) limits all together (CDARS, ICS Sweep). These products pay way less interest however.
Money market mutual funds proved, yet again, that they pay more than 95% of banks during a bull market. But also that 5% of banks will pay more for large deposits.
And, most importantly, that the FDIC now insures almost all deposits (EVEN UNINSURED) - best evidence by:
Of the 522 failures, just 31, or 5.9%, were resolved in a manner that only protected insured deposits — uninsured depositors were therefore put at risk of a loss. Those 31 banks and thrifts held just 4.9% of the deposits of the post-IndyMac failures.
In the other 491 failures, which held total estimated deposits of $286 billion at the time of failure, uninsured depositors suffered absolutely no loss. Additionally, because these failed banks were resolved through P&A transactions, the depositors and borrowers in these banks suffered minimal disruption in their banking and borrowing activities.
To summarize: In over 10 years and with a sample size of over 500 bank failures, uninsured depositors ONLY LOST ANY MONEY 5% of the time.
"Any money" is key here as most still were paid back in full.
This is the result of the FDIC finding a buyer for all of the deposits at the failed bank (including the uninsured deposits) and simply transferring all of the money to the new logo.
Additionally, banks do not fail randomly overnight.
They make shitty loans to shitty borrowers that do not pay them back.
This is almost always incredibly evident up to 2 YEARS before they actually fail (it takes a lot of time to make that many shitty loans).
Most of the time, not only is the FDIC but also the OCC & the Federal Reserve regulating the SAME BANKS. So you have 3 massive regulatory agencies all looking at the same numbers. One of them is likely to force the bank to stop fucking up before it's too late.
If not, banks have to report their financials to the public. That means any uninsured depositor can stay informed of any major increases to risky loans or stupid financial moves by management. You can find those reports here: https://cdr.ffiec.gov/public/
Bank fucking up? You can move your money instantly in 2020.
Lastly, even if the bank fails and the FDIC cannot find a buyer, uninsured depositors can still be paid back in full.
When the FDIC is unable to find a buyer for the uninsured portion of deposits, they then are forced to repay these deposits by selling off the failed bank's assets - loans & investments most of the time.
Uninsured depositors have FIRST PRIORITY over all creditors and shareholders.
Even if we assume 20-30% of the bank's assets are total trash, more often than not there will be enough leftover to pay back uninsured depositors in full.
Why this all matters for Froogal users
Froogal is shifting to uninsured deposits for all users this Winter.
Our team at Froogal decided that the small loss of security was worth the significant rate increases we could provide to users through our featured banks.
We know that some users may not be comfortable with this (sorry!) but it's a calculated risk to increase your speed to FIRE.
As it stands now, uninsured deposit balances ($250k, $500k, $1M, $10M+) pay signficantly more than the highest personal savings rates.
This is the norm - and the difference will only become greater as rates rise again.
A basic example of this is a $500k deposit today currently can early about 1.30% whereas the best paying personal savings account (Citi) is only paying 0.80%.
During my tenure with the US Treasury, it was not uncommon to see banks paying small depositors up to 2-3% less than their largest balance clients (so 1% for a person with $20,000 and 3% for someone with $2M).
As you already know, Froogal users can select from any deposit account at bank/credit union at any balance tier.
For us to provide this, it was necessary for the deposits (your deposits) that we place at these banks to go into the "uninsured territory".
So that's it.
We figured out a way to help you earn even more on your savings with only a little bit more risk. And that is why we got rid of the FDIC insurance coverage for Froogal users.