Stop the Insanity, Your Savings Are Safe
I was startled by television images of people lining up at IndyMac Bank to get their deposits out of the bank since it was taken over by the federal government. One woman said she was going to put her money under the mattress. In a word, this is INSANE.
I did a quick segment on the Mike & Juliet Show on Fox Network explaining why, but I wanted to reiterate the information here, with a few salient details, because people are becoming totally irrational about the financial crisis. (My own suspicion is that the media feels they dropped the ball on the sub-prime mortgage debacle and don’t want to miss the next crisis.)
Should you panic? NO! Regulators say that 99 percent of U.S. banks are in good shape — or in industry-speak, “well capitalized.” Indymac, the fifth bank to fail this year, lent a lot of money to people who had no incomes and poor credit. Not surprisingly, people with no jobs and no history of paying back their loans tend not to pony up the money you lend them. There are an estimated 100 to 150 banks having similar troubles. But that’s only 1% to 2% of the banks in the U.S.
We have been here before. In the 1980s, banks lent obscene amounts of money to commercial real estate developers, who tend to act like drunken sailors when you hand them a wad of cash. Aided by a Texas oil boom and favorable tax-shelter laws, they built office buildings and condos like crazy, even when there was no demand for them. They defaulted on their loans, and the empty office towers and condos were repossessed by the banks.
During the 1980s, more than 1,100 commercial banks failed or received assistance from the government. — 8 percent of the total. Another 900 savings and loans went belly up — representing 17.5 percent of all thrifts operating at the beginning of the 1980s.
Congress created the Resolution Trust Corporation (RTC) to clean up the mess. Between 1989 and 1995, when it was shut down, the RTC liquidated the assets of 747 institutions with more than $220 billion in deposits. The estimates of the cost to taxpayers vary widely; this FDIC analysis suggests the total was $153 billion.
Almost all banks are insured by the Federal Deposit Insurance Corporation, or FDIC, created in 1933 during the Great Depression to restore confidence in the banking system. It insures up to $100,000 of the money you have spread among checking, savings, certificates of deposit or money market deposit accounts (which are different from money market mutual funds). The insurance is $200,000 for joint accounts, and $250,000 for funds in an individual retirement account (IRA).
NO DEPOSITOR WHO HAS HAD LESS THAN $100,000 IN THOSE ACCOUNTS AN FDIC-INSURED BANK HAS EVER LOST A PENNY OF THOSE FUNDS IN THE LAST 75 YEARS.
To find out if your bank is FDIC-insured, look for the sticker on the bank’s front door or click here: http://www.fdic.gov/deposit/index.html
So what if your bank fails? As long as your deposits are under $100,000 in the accounts mentioned above, you don’t have anything to worry about. IndyMac’s account holders had access to everything — the only exception was that online banking and billpay were down for two days.
The FDIC does NOT guarantee other investment products that banks sell, such as mutual funds or brokerage accounts. If you want some assurance for those accounts, make sure the bank is a member of the Securities Investor Protection Corporation — or SIPC.
When IndyMac failed, some 5% of depositors had more than $100,000 in the bank. Don’t be that person. Stop worrying about things that you can’t control that are insured by Uncle Sam. Focus instead on getting the best deal from your bank: free checking, low or no minimums, a decent interest rate on your savings (see bankrate.com for the best savings rates) and no ridiculous fees for overdrafts or ATM usage. That’s where you’ll lose money. Not in a bank failure.
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September 19th, 2008 at 11:58 am
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