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Defend yourself against failing banks |
| By Laura Bruce • Bankrate.com |
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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.
There was approximately $1 billion in uninsured deposits spread
among consumers, businesses and nonprofit organizations.
The sad reality for those customers is that they're
getting $0.50 on the dollar for their excess deposits. Anything
they get above that will be determined by the sale of IndyMac assets.
You can bet many individuals had substantial amounts of money not
covered by FDIC insurance and may end up losing at least a quarter
of their funds.
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 and National City, which have been
in the news for needing capital, to the many community banks that
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 so 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.
"Consumers need to be smart about where their deposits are in this environment," says Satlow. "Banks are in a much
weaker financial condition than they've been in for many years. (Stay within) FDIC limits and be smart about how you structure your
accounts. The other lesson that's important is that there's a reason why certain banks will offer higher yields than others. Cast a
wary eye on yields that are noticeably outside the pack. If a bank is offering 50 or 100 basis points above the pack, you need to know
why. How can they afford to pay 100 basis points more than another bank and why would they?"
Satlow says a higher yield isn't always a sign of a bank in critical financial condition and, in fact, online banks
have what he calls a natural overhand advantage in this area. But he advises consumers to be wary and make sure all deposits are insured.
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| U.S. Bank failures 2007 to 2008 |
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| Institution |
Closing date |
| IndyMac Bank, Pasadena, Calif. |
| First Integrity Bank, NA, Staples, Minn. |
| ANB Financial, NA, Bentonville, Ariz. |
| Hume Bank, Hume, Mo. |
| Douglass National Bank, Kansas City, Mo. |
| Miami Valley Bank, Lakeview, Ohio |
| NetBank, Alpharetta, Ga. |
| Metropolitan Savings Bank, Pittsburgh |
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