Dear Dr. Don,
Bloomberg quotes Sheila Bair, FDIC chairwoman, as stating the FDIC could go bankrupt amid (a) surge of bank failures. What do you suggest I do with cash before that happens? To what should I convert my cash before storing it in a safe-deposit box? What about New York Life Insurance Company’s solvency? I have an annuity there which is not insured by (the) FDIC.
— Concerned Karen

Dear Karen,
In her March 2 letter to industry managers, Bair was arguing for additional assessments to keep the insurance fund solvent in the face of higher deposit insurance limits and the expectation of more failed banks through 2010, according to news reports.

We know the insurance fund is facing financial pressures. Trying to increase funding to preserve the fund’s liquidity makes sense. Taking your money out of the banking system and sticking it in a safe-deposit box because the FDIC is working to increase the size of the insurance fund doesn’t make sense to me.

The FDIC guarantee is based on more than the monies held by the insurance fund. An FDIC-insured deposit carries a full faith and credit pledge of the U.S. government. When you start calling that pledge into question, you open up a whole different debate about the safety of monies on deposit.

I discussed all this in an earlier column, “U.S. government stands behind deposits,” and sounded a cautionary note. However, I weigh in on the side of the government doing what it needs to do to keep your insured deposit sound.

An economist would argue this more eloquently, but if everyone takes their chips (savings) off the table, there’s no one investing in the future of the economy. Your money may be “safe,” but you’re not better off because you’ve sacrificed future growth for capital preservation.

If you feel you must get your money out of the banking system, try investing in U.S. Treasury securities — another investment with a full faith and credit guarantee — by opening a TreasuryDirect account. I like Treasury inflation-protected securities, also known as TIPS, but they’re not right for all investors. Talk to your investment and tax professionals before investing.

Annuities are as secure as the insurance company from which you bought them. State insurance regulators have specific reserve requirements backing annuity investments. I’m not able to tell you how safe and secure your annuity is with New York Life, but the company carries high financial strength ratings from A.M. Best, Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.