NEW YORK — New York--If Congress accepts the Treasury's new proposal for putting limits on federal deposit insurance, could you get around the rules? Answer: Absolutely, and with ease. Here's what the Treasury has in mind and the steps you'd take to keep all of your savings government-insured:
* You'd be allowed no more than $200,000 in protected deposits in a single institution -- up to $100,000 in a retirement account and $100,000 for everything else. That would end the government's current practice of offering separate coverage for Individual Retirement Accounts, Keoghs, joint accounts and trust accounts.
But this apparent cutback is pure sleight of hand. First, the vast majority of savers fall under the $100,000 limits. Second, savers with excess funds could simply move them to another insured institution. You'd be inconvenienced but not uninsured.
* You would no longer be able to buy insured certificates of deposit through a stockbroker. At present, many banks and S&Ls gladly market their CDs through brokers; the brokers scoop up money from thousands of investors and provide each person with an individually insured account. Typically, these CDs pay 0.4 to 0.7 percentage points above average, says Norberto Mehl of Banxquote Money Markets.
But de-insuring brokered CDs wouldn't take those attractive investments away. You'd simply buy them directly from the bank, without using the broker as a middleman. Consumer publications exist that list the highest-rate CDs. One such: "100 Highest Yields," P.O. Box 088888 in North Palm Beach, Fla.
* Certain bank deposits over which you have no control would remain separately insured. For example, say you're buying a house and use an attorney as a go-between. Typically, you give the lawyer an upfront deposit which the lawyer puts into his or her escrow account. If the bank fails, each person with money in the escrow account would have an extra $100,000 worth of coverage.
* Complications arise only for pension plans that keep money in banks. But they, too, can take evasive tactics.
Every member of a pension plan is separately insured for $100,000. Under the Treasury's proposal, that rule would be continued only for two categories of plans: First, state and local government plans (count on government to take care of its own); and second, pension plans whose investments are chosen by the saver rather than by a professional money manager. In the second category would fall Individual Retirement Accounts, most Keogh plans, company thrift plans and 401(k) plans.
Full deposit insurance would end for so-called "defined benefit" plans (plans that promise a fixed monthly payment at retirement based on pay and years of service). Instead of having $100,000 worth of insurance for each employee, such plans would have $100,000 total, which, for large plans, would leave bank deposits mostly uninsured. If the manager chose a feckless bank, that money could go down the drain.
Such a risk is exactly what's needed to add "depositor discipline" to the banking system, says John Dugan, the Treasury's deputy assistant secretary for financial institutions. Presumably, the pension-fund manager would take great pains to find a safe bank. If he or she guessed wrong, your pension usually wouldn't be at risk. In a defined-benefit plan, the monthly payment is an obligation of the company, not of the bank. If the company failed, payments up to a certain ceiling are guaranteed by the Pension Benefit Guaranty Fund.
But even this provision could easily be evaded. The fund manager might switch all the money out of banks and into Treasury securities, which are fully guaranteed.
* A more radical proposal would insure you for no more than $100,000 in all banking institutions combined. The Treasury wants it studied; the bankers want it killed.
In order to enforce such a rule, the feds would have to monitor the whereabouts of all your deposits -- an unacceptable invasion of privacy. What's more, accounts in excess of $100,000 can simply be switched into Treasury securities. Result: no loss to savers but a significant loss of deposits to banks.
I rate this final "reform" as too dumb to live.