Defend yourself against a failing bank

As the FDIC mops up the mess that was once IndyMac Bank, consumers are left with unpleasant images of long lines of worried customers waiting to get their uninsured deposits back. It's a tumultuous time for the financial industry. The crisis is running the gamut from investment banks such as Bear Stearns to government-sponsored enterprises -- such as Fannie Mae and Freddie Mac -- and, of course, to institutions like Wachovia, Washington Mutual, National City, which have been in the news for needing capital, and however many community banks are in trouble.

"There's a crisis of confidence," says Les Satlow, portfolio manager at Cabot Money management in Salem, Mass. "IndyMac telegraphed that it was going to be in deep trouble, but when confidence finally buckled it was the final nail in IndyMac's coffin. From the way management talks about what's going on at banks, it's very clear that their first priority is to maintain confidence as they don't have a run -- and that applies to consumer and investment banks."

Which is why Washington Mutual and National City recently released statements regarding their capitalization and liquidity, with National City going so far as to say it was responding to market rumors and that the bank was not experiencing unusual depositor or creditor activity.

"People grossly overreacted to IndyMac Bank," says Bert Ely, banking industry consultant and president of Alexandria, Va.-based Ely & Company.


"IndyMac was an outlier. We knew it was going to fail. But the lineup of people after the FDIC took over ghastly overstated conditions in the banking industry that led to the panicky reaction. Earnings figures for the second quarter aren't the greatest, but they're not the gloom and doom people had been foreseeing. It'll be a slow, bloody recovery from the credit correction, which was overdue and much needed. But a lot of people tend to equate a bank reporting a loss with a bank failure. That's why banks have capital -- it's a cushion to get through a period of losses. IndyMac didn't have enough capital."

The watch list

The FDIC says 90 banks are currently on its "watch list," but that isn't to say the agency is aware of all of the banks that are in trouble. There's still room for commercial and residential real estate to deteriorate and that could cripple some institutions. But, to be clear, being on the watch list doesn't mean a bank will fail; the agency says historically about 13 percent of banks on the list fail.

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