How the rich keep their money FDIC insured

Exploiting FDIC Loopholes Enriches Former U.S. Bank Regulators
By David Evans

Sept. 25 (Bloomberg) -- As chief of staff of the Federal Deposit Insurance Corp. from 1999 to 2002, Mark Jacobsen was responsible for a safety net that protects U.S. savers. He now runs a company that critics say is designed to stretch that net to its breaking point.

Jacobsen, 42, is president and co-founder of Arlington, Virginia-based Promontory Interfinancial Network, a company that makes it easy for a wealthy depositor to keep FDIC-insured cash in separate accounts at multiple banks. It offers customers up to $50 million of FDIC insurance, 500 times the single-account limit approved by Congress.

``When I first saw Promontory, I was amazed that the regulators would let it fly,'' says Sherrill Shaffer, a former chief economist at the New York Federal Reserve Bank. ``It undermines a lot of the safeguards around the FDIC deposit fund. I'm astounded that the FDIC has not picked up on that and tried to shut down that loophole.''

The loophole Promontory exploits is the FDIC rule that allows an individual to open up federally insured accounts of up to $100,000 at an unlimited number of banks.

Promontory has contracts with 2,350 banks. It advertises to wealthy investors who want to insure more than $100,000 in certificates of deposit. Customers tap into Promontory's network through their home banks.

Promontory arranges for the customer's money to be divided among banks, with each receiving less than $100,000 so all of the cash is FDIC insured. The receiving banks pay Promontory a fee, and in return, Promontory directs deposits to them.
Working the System

Promontory is peopled by former federal banking officials. Jacobsen started the company with Alan Blinder, who was vice chairman of the Federal Reserve from 1994 to 1996, and Eugene Ludwig, who was Comptroller of the Currency from 1993 to 1998.
William Seidman, the FDIC's chairman from 1985 to 1991, is a board member. William Isaac, who chaired the FDIC from 1981 to 1985, is chairman of the company's bank advisory board.

``These guys know how to work the system,'' says Shaffer, who's now a professor of banking at the University of Wyoming in Laramie. ``They saw a good buck in it for themselves.''
Seidman says he knows Promontory has critics. ``The question can be raised, `Is this what the government wanted when they put in deposit insurance?''' he says. ``One man's loophole is another man's God-given right.''

Does the Legwork
Jacobsen says the company provides a service for investors and does nothing improper. Individuals could open accounts on their own or through brokers at hundreds of banks. Promontory does the legwork at no cost to depositors and helps community banks compete for deposits with large money-center banks, he says.
The firm calls its system CDARS, an acronym for certificate of deposit account registry service.

``What we're doing is no different from what others have been doing for many decades,'' Jacobsen says. ``We just make it a little bit easier. Instead of having to knock on the doors of 20 banks to deposit $2 million, or going to a broker to do the same on your behalf and collect a big fee, we allow banks to offer the service directly.''

Isaac says he's not sure what role he plays at the company. ``I think I'm some kind of an adviser or director,'' he says. ``I'm not really involved. The board of advisers has never met. I allowed them to make me the chairman of a bank advisory board that has no members.''

`Significant Amounts'
Blinder, Promontory's vice chairman, says the company has eliminated any need to increase the $100,000-per-account ceiling on what the FDIC covers.

``It's not so important anymore, because any depositor who's worried about that can, through CDARS, get very significant amounts of deposit insurance,'' he says.

Edward Kane, senior fellow of the FDIC's Center for Financial Research, says CDARS intercepts FDIC premiums.

``It's portrayed as a public-spirited way to help customers as opposed to a way to game the system,'' he says. ``They've decided there's a loophole that they're in charge of.''
More than 50 banks joined Promontory after IndyMac Bancorp Inc. collapsed in July.

Promontory placed more than $10 billion in August. That's up from $1 billion a week in January, says spokesman Phil Battey, who worked in public relations for the FDIC from 1994 to 2003.
Promontory charges banks more in fees, about $12.50 per a $10,000 one-year CD to get access to federally insured funds, than the FDIC itself charges in insurance premiums, typically $5-$7 per $10,000 deposited.

`Tiniest Nibble'
``We take the tiniest nibble,'' says Ludwig, now Promontory's chief executive officer.
FDIC Chairman Sheila Bair says she's surprised that Promontory gets a higher fee than her agency. ``That's an interesting question,'' she says. ``I'll have to look into that.''

To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net Last Updated: September 25, 2008 00:42 EDT