Will Your Bank Fail? What You Need to Know About FDIC

By Evelyn Black, on July 16th, 2008

The recent failure of IndyMac bank came after a week of constant reassurance from its corporate handlers that everything was fine, really, just fine. Then, on Monday, July 14, after a harrowing weekend spent scrambling for solutions to the Fannie Mae and Freddie Mac mess, George Bush went before press conference cameras to reassure the American people that everything is fine, really, just fine.

I don’t know about you, but my immediate response to that was, “Oh God, we’re all screwed!”

I did calm down though. (At least for now I did, check with me later this week and that may change.) All of that news footage of people lined up outside IndyMac to get their money helped me remember that, hey, we do have a bit of help here: the Federal Deposit Insurance Corporation, created after the Great Depression to prevent bank runs by insuring depositors’ money up to $100,000 per customer.

Can you really get your money back if your bank fails? What if you have more that 100K? What about your investments? How can you tell if your bank is on the list of 90 that may be in trouble this year? What follows are some basic precautionary measures you can take right now, along with information that may help:

Know Your FDIC insurance limits.

Deposits at retail banks include products like checking accounts, savings accounts, and CDs. You are insured through FDIC for up to $100,000 at each retail bank where you have these deposits. If you are married and your accounts are held jointly, you have $100,000 each, so you are actually covered for up to $200,000 on all of your jointly held deposits at one bank. IRA accounts are insured for up to $250,000, and that is in addition to the $100,000 each for ordinary deposits.

What if you have more than $100,000 on deposit? You can move anything in excess of that $100,000 to another financial institution, where you will get another $100,000 in FDIC coverage. Should you do this? Probably not, unless you are currently keeping that money in a shaky regional bank. Even then, you want to think twice about it, then think again. Don’t act out of fear. That’s what starts a bank run.

If you have more than the $100,000 limit on deposit and the bank is seized by FDIC, you will get a percentage of the amount over the limit if your bank is shut down. Right now at IndyMac the FDIC is projecting 50-75% refunded on everything over $100,000 depending on how much cash the bank can raise when assets are sold off. So, say you had $150,000 on deposit. You’ll get your $100,000 back no problem. On the $50,000 over the limit you’ll get between $25,00 and $38,000.

So if you have lots more than $100,000 in a single bank and that bank is a smallish regional bank, you may want to review your strategy. Keep in mind that most CDs carry a penalty for early withdrawal, so you will have to factor that into your decision.

Keep Some Cash On Hand.

I advise people to do this even in ordinary times. You never what will happen: a storm blows out the electricity for your city and you can’t get to your money for a day or two. An emergency arises such that even a trip to an ATM is too much wasted time. You never know. It doesn’t hurt to have a couple hundred tucked away at home, in a box in the freezer, under your mattress, anywhere you feel safe keeping it. Most homeowners insurance policies will cover up to $200 in cash if you experience a break-in, so I wouldn’t keep much over $200, but do keep some money at home. That way, whatever happens, you won’t panic, and you have some milk and gas money to carry you through.

Research Your Financial Institution.

I read the New York Times daily, but any paper that carries stock prices and financial information will do, and lots of information can be found online. Do a news search under your bank’s name and see what comes up. Compare your bank’s stock performance with the performance of comparable banks. Read the press releases sent out by the bank itself. They are usually listed right on the stock page under the description of the bank. Do you see any red flags?

Red flags include a rapid drop in stock prices since November of 2007, heavy investment in home equity lines and mortgages, recent CEO turnover, and press releases stating that everything is fine, just fine, and all rumors are false. Banks don’t issue press releases saying everything is fine unless something is wrong.

However, even if your money really is in one of the stressed regional banks, you should still think twice before pulling all of it and moving it somewhere else. The reason IndyMac failed as fast as it did was that people panicked and started to pull all their money all at once.

Most of the depositors will in fact get every penny of their money back in the event of a bank failure. Bank runs are self-fulfilling prophecies: A few people get scared, that spreads, and pretty soon it’s a not so wonderful life all over again. I personally work for a regional bank on the short list for big trouble, and I have all my money there. Am I going to pull it? No. How can I advise other customers to stay with us if I pull my own money out of fear? I can’t do it, and besides, I’m not very rich anyway.



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Congress Turns to Depression-Era Ruling to Save Present Economy

By B.P.T., on July 15th, 2008

The Foreclosure Prevention Act of 2008 – or Bill HR 3221 – is Congress’ latest attempt to stymie the downward spiral of the current economy. The bill is lurching along, having passed the Senate as of July 10 but still awaiting possible changes or even a veto by the president. The foreclosure mess is a major headline every day, so it is not a surprise that politicians are scrambling to try to find a fix.

What does the act do? A huge variety of items are included in the bill, some related directly to the foreclosure disaster and others seemingly a bit removed. Provisions include items such as relief for businesses most directly affected by the crisis and tax credits to home buyers who buy homes in foreclosure. It also includes provisions to help ward off future similar events by changing the Truth in Lending Act so purchasers are clearer on what they are getting into before they sign on the dotted line.

The most important provisions, however, are the ones that offer direct assistance to homeowners facing imminent foreclosure. Two major sections include funding for pre-foreclosure counseling, in the hopes of helping debtors and their mortgage holders connect and work out the problems amongst themselves, and allowing housing agencies to issue bonds to generate additional income to refinance subprime loans.

One potentially questionable area, however, is Title IV of S. 2636, as it is called before being amended to HR 3221.This provision would alter the Bankruptcy Code, allowing a bankruptcy judge to actually modify the mortgage agreement by reducing interest rates. Whether or not this will pass remains to be seen, as the entire bill is sliced, diced, and put back together. If it stands as is, the question on this section, however, is whether or not this bill violates the Contracts Clause of the Constitution, which reads in part, “No state shall… pass any law impairing the obligation of contracts.”

An eerily similar situation arose during the Great Depression, in the famous 1934 case (which is still good law, incidentally) Home Building and Loan Association v Blaisdell, in which mortgage defaults were staved off by an extended period of default. The mortgage companies were not allowed to foreclose as soon, protecting homeowners. This occurred during the Great Depression, when homeowners were losing their houses at a rapid pace. The Supreme Court reasoned this was not a permanent impairment, only a temporary one, and was therefore allowable.

HR 3221, however, if passed as written, could permanently alter or impair private contracts by allowing a bankruptcy judge to modify mortgage agreements by reducing interest rates. Depending on the final wording, this could be imminently distinguishable from Home Building and Loan. The question for now is, will it pass constitutional muster? Since all laws are made with a presumption of constitutionality, it will have to be challenged in court before we may know for sure…. Of course, since these mortgages are already in bankruptcy, it can be argued that the contract has already been modified with such severity that these alterations in rates are simply a saving grace.



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