New Risks to Your Assets
Lodmell & Lodmell has traditionally been an asset protection law firm dedicated to helping individuals and families protect themselves from frivolous lawsuits and other legal risks. That is still the main focus of the law firm, but in 2008 we were alerted to a number of other risks to assets. Specifically, the failure of Bear Stearns followed shortly thereafter by the bankruptcy of Lehman Brothers alerted us to the idea of institutional risk to go along with market risk.
In particular, institutional risk is the risk that the bank (or other similar financial institution) where your cash is held fails. But it goes beyond simply the risk of your financial institution failing. That’s because all of the financial institutions in our country and, to some extent, globally are interconnected. That means if one bank or brokerage house fails, the risk of contagion (and of imminent failure) to other financial institutions is very real.
The Reason for TARP
Remember the Troubled Asset Relief Program, affectionately called TARP? The reason for the TARP bailout was simply to prevent to a series of defaults to prominent financial institutions. The truth is that if the federal government had not provided a bailout, the U.S. likely would have suffered the loss of a number of major banking houses. The reason is simple: Banks are largely interdependent. They loan money to one another to meet reserve requirements imposed by the Federal Reserve. In other words, when a bank’s capital falls below the mandated minimum, it must borrow money on a short-term basis in order to stay in compliance.
When one major banks fails, as happened in 2008 with the failure of Lehman, then other banks become skittish about lending to one another. That’s because the short-term “reserve requirement” loans become extremely risky, and financial institutions stop throwing life rafts to one another. TARP was an injection of liquidity meant to keep the system moving forward–meant to keep money flowing between financial institutions so that the system didn’t “freeze.”
Money Kept in Banks is Also Exposed to Risk
This means that with very few exceptions, even the money we keep in banks at cash is exposed to some measure of risk. The central message of this article is simply to alert you to that risk. We all take risk every day. What’s important is that we be aware of the risks we’re taking, because it is the unknown risks that really catch us off guard.
If you’d like to discuss institutional risk and how you can reduce or eliminate it as an added asset protection strategy, call Lodmell & Lodmell today. We will be more than happy to learn about your circumstances and make specific recommendations.