Outside of FDIC insured world, this never happens. Higher returns are accompanied by higher risks. That's why I think we ought to introduce a little bit of risk sharing: a lower cap; or co-insurance (say 95% insured between $25k and $100k); or a deductible (first $500 is not insured).

Very good idea. I am not sure if the depositors robbed the bank. The rate chasing could be seen as picking up the dollar bill that was lying on the street. You can't blame the depositors for wanting any extra return they could get.

_brij

This may be a surprise, but depositors also robbed FDIC.

The depositors entered into a contract agreement with the bank. They held up their end of the deal: they let the bank use their money under the condition that it was FDIC insured. Customers taking advantage of an offer from a bank is not theft. It's not their job to determine that the bank is taking absurd risks. That's the job of the insurer.

Senator Charles Schumer is like the child who yelled the emperor had no clothes.

You've got your metaphor wrong. The child was the only one who was innocent/naive/not afraid to speak truth to power.

The metaphor you are looking for here is shouting "Fire!" in a crowded theatre. Even if it is true, the stampede you cause may be worse than the fire.

Short Sellers of IndyMac Stock. A reader pointed to short sellers who drove IndyMac's stock price to the pennies. Short sellers profited from the stock decline but their profit came from other investors who bought IndyMac's shares at higher prices. They didn't take FDIC's money.

You got this one right. Normal short sellers are betting against the people still in the theatre. Hedge funds often like to profit from the stampeding. In this case their shorting is shouting "Fire!" That's usually easier to do when the theatre is actually burning.

I wouldn't advocate a $0 insurance, but $100,000 insurance seems high. Maybe $25,000 is enough. If you have $100,000 in cash, (a) you're stupid to put all of that in cash instead of Treasuries, money market, low risk bonds, etc, etc and (b) if you have $100,000, you're likely to be able to withstand a bank failure.

What we need is catastrophic insurance for those who cannot afford to have catastrophic things happen to their cash reserves. So $25,000 sounds reasonable. $100,000 sounds way unreasonable and hides the true cost of putting your deposits in a risky bank.

Depositors? No, absolutely no way. Depositors provided capital that could possibly have SAVED IndyMac (if its management had been wiser in where they put the money). The depositors didn't set the interest rates; if anything, as more depositors flocked in the bank would be inclined to lower their rates.

Now, the people who participated in the "run" on IndyMac could be accused of robbing the FDIC. That's actually plausible, and without a doubt THEY are a subset of the depositors. But frankly, the bank had agreed to provide their money on demand, so they were well within their rights.

The FDIC itself (well, and Congress) set a large number of the rules that make this happen; for example, if it were possible for a bank to charge a "load fee" (or if the FDIC imposed a tax on withdrawals) during a run, the run would have been _vastly_ smaller.

And then there's the Federal Reserve's inflationary money supply policies… Those are what inflated the bubble in the first place, almost at the same time as they cushioned the landing from the dot-com/9-11 crash.

But either way, I'm definitely blaming the GENERAL problem on opaque risk-taking with mortgage-based securities.