Thoughts on Banks

Ran into these two pieces this morning -- both dealing with the issues raised by the IndyMac Bancorp failure recently. The first says that more banks will end up failing:

But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.

The second offers solutions on how to keep your money safe from a bank closing -- assuming you have more than $100k to sock away:

First, you could deposit $100,000 in one bank and then walk across the road and deposit another $100,000 in a second bank. And so on.

Second, you can take part in a program known as CDARS run by Promontory Interfinancial. Details are here. This allows you to deposit your money in one bank, which will then parcel it out in federally-insured $100,000 lots to various other banks. Net result: The whole thing is insured.

As the piece notes, I'm not sure why anyone would keep more than $100k in cash in a bank, but I guess you never know.

Comments

[Aaron]

Failing banks. Ugh. Is it just me or is this really scary? I actually didn't sleep last night after reading an article about this. Being someone who is still in debt for some reason this just terrifies me.

It will be ok....

[jake]

Funds in accounts are protected up to $200K if it is joint account ... $100K per account holder... so if you have a joint savings accounts with wife ..you are safe up to $200K ...

[savvy]

Actually, you can keep up to $400K safely in one bank provided you structure your accounts as follows - husband individual ($100K), wife individual ($100K) and joint ($200K).

[Kevin]

I wonder if folks that have brokerage accounts at some of these banks (or their investment arms) are at risk too? I know they are insured by the SIPC, but that might be another risk that hasn't been discussed too much.

[justin]

How much of this is a "real" problem with these banks and how much is kind of a snowball effect of people freaking out because of the doom and gloom on the news?

[dwr]

"As the piece notes, I'm not sure why anyone would keep more than $100k in cash in a bank, but I guess you never know."

Maybe some people knew the stock market was going to implode, and took their money out, waiting to go back in when things are 40% cheaper?

[Heidi]

You would be shocked at how many individuals have millions in bank accounts - especially the parents of the boomers. They don't trust the market, and won't talk to anyone about an annuity or other risk products. At a previous job I had one client with $8.4MM in CDs at our bank. The president of the instituion tried to get her to talk to an advisor or trust officer, but she refused.

Money is emotional - people don't always make rational decisions.

That being said, most large, national banks are pretty safe places for deposits over the FDIC limit. The government would never allow a bank like Citi, BoA, or Wells to fail. And in the outside case that they did, you may not be able to count on FDIC anyway.

[Kim]

I have over $400K in cash right now from the sale of a house in 2004. I've been waiting for the real estate market to cool to buy other property and did not want it tied up in the stock market, a bond, or a CD. This money is separate property from my husband, so I cannot list him as a joint owner. I've been trying to keep less than $100K at four different institutions, but the rates were wildly different. I was getting a great rate from WAMU, but today I'm moving opening new accounts at several other banks for $95K each. I'm not going to worry about the few hundred dollars a month I'll lose in interest. My husband's business account is at WAMU and has $500K (has been up to $1MM), but we are in the process of moving that money today. My retirement accounts are all at USAA and total over $750K, but they have never been in the business of subprime loans, so I don't think they will fail.

I have to admit the news of IndyMac has scared me more than a little.

To answer your question as to who would keep over $100K in cash, my response is "A lot more people than you realize."

[FMF]

Kim --

Actually, my question wasn't "who" it was "why". Seems like a money market account would be a better option.

[cmadler]

@Kim: When I saw that question, your situation (people who sold a house and are waiting to buy) immediately popped into my mind.

Another situation would be if you came into a large amount of money suddenly (e.g. an inheritance) and wanted to invest it gradually rather than throwing it all into the market at once.

It could be an attempt at market timing, as dwr suggested.

In most cases, I suspect that it's an emotional issue. Older people who grew up in or soon after the Great Depression (my grandfather-in-law kept thousands of dollars buried on his property, in the freezer, etc.), younger people who just aren't comfortable with the ups and downs of investments, and so on.

[Kim]

FMF, thanks for your response. All the money is in MM accounts, except for a business checking account that holds about $50K.

[FMF]

Kim --

Sorry, I forgot to be more specific. How amout a MM with a major investment firm? I keep my cash in a Vanguard MM. I think it would take an awful lot for those funds to be at risk.

[Kim]

Yes, FMF. I had $100K at Vanguard, but the interest rate was half what WAMU was paying. I'll likely move that money back to V-guard.

[FMF]

Kim --

Really? I've always founf Vanguard Prime to be in-line with what banks were paying.

[Jake]

FMF --

Yields on money market funds are going to be highly dependant on what yields T-Bills are paying. These are traded in the bond market and can move on a dime.

Rates on savings accounts are much "stickier" and are effected by factors besides the short term interest rate market, including bank policy. That's why you see so much varation between banks. The rates are also not as closely tied to the T-Bill, they are effected by the rest of the yield curve as well.

Right now you have an environment where the 2yr treasury is now at 2.39%, and was trading at 3% a month ago, but the range over the last 3 months has centered around 2.5%. Meanwhile the 3mo TBill is yielding 1.4%, which is much lower than just last week.

So for right now, money market funds like Vangard Prime are being pulled down by the anchor of the T-Bill rates, but savings account yields are higher because of (1) the current yield curve shape, (2) the stickiness of savings account rates, and (3) the fact that some banks are pretty desperate for capital right now. Better to get more deposits in the door at 3% or 4% than to be forced into issuing bonds at 11% or 12%, even with the inefficiency that you are paying that extra interest also to people whose actions won't be changed by it.

[Kim]

I was getting 3.8% in a liquid MM at WAMU. Vanguard couldn't touch it. It was the difference of about $7-8K per year in interest.

[FMF]

Kim --

I see. Guess I've never been in a position to have to hold $400k for four years in cash. ;-)

[Matt]

I work at a local credit union in Atlanta. I see people with over 100k in accounts all the time. Ecspecially in the older generation. Our credit union insures up to 250K per account holder.

[Bad_Brad]

I am frankly astonished and amazed that:

1) There are people out there that keep $100k in a commercial bank account, and
2) There needs to be a SERVICE for some of these people to actually parse out their $100k among different banks to make sure FDIC insurance covers the whole amount (how hard is it to split up money amongst banks???)

#1 I can sort of see, if you are pretty wealthy to begin with and maybe you have a CD ladder. But #2 just baffles me. It's a crazy world sometimes.

[James]

To the Poster who has Money in WaMu:

Please consider very carefully your holdings in that bank! WaMu's share price is tettering around $3.30, also the company has been hit with bad news after bad news.

I would investigate and strongly consider taking your money out of WaMu.

Best,

James

[Mike Hunt]

I agree with James. Unfortunately Wamu is on the deathwatch list.

This banking issue is a big crisis of confidence which is truly scary. All banks are overleveraged (they are allow to lend 10 times what they have taken in through deposits) and the reason that IndyMac ultimately failed is that there was a massive run on the bank. This was through depositors withdrawing their money since that note came out in late June. If people panic and withdraw their money even a solvent and well run healthy bank will collapse. This is runaway panic and nobody wants this. Deep breath.

Now for the scary bit. The FDIC only has reserves of about 52 billion dollars and the IndyMac coverage will take up anywhere from 4% to 10% of the money they have. If they have to step in to cover other banks they will need to take down more money which I'm sure the FED will provide. And with Freddie & Fannie the Secretary of the Treasury Paulson has said that there are no limits to what the government will cover to keep them solvent. If you look at the housing bubble and feel like I do- that we have another 30 - 40% percent to fall before we get to where we were pre-bubble then that means we are talking about 2 trillion dollars of bail out money just for F&F. God knows how much more for other banks that fail. That means that our debt will increase from 9 trillion to potentially 13 - 14 trillion. Given that the erstwhile foreign treasury buyers (the Saudis, Chinese, Japanese and Europeans) don't trust the US system right now there will be a paucity of buyers. And the dollar will going to freefall yet again. Expect gold and silver to shoot up again.

The problem is that all fiat money systems are in essence a bit of a con. There is nothing backing them but trust. Once the trust gets eroded then look out below. And this is a shaky moment for us right now.

-Mike

[FMF]

Kim --

Sounds like you should consider making the move quickly.

[Bad_Brad]

Mike - I think there is an overreaction here. IndyMac was not in good shape even in better times. Their primary product was sub-prime mortgages. At larger banks, sub-prime is a very small % of their overall business. Will these banks take a hit? Absolutely, most already have. Among the stronger banks who have been thrown out with the bathwater so to speak, there are some excellent buying opportunities if you are a long-term investor. If you have less than $100k in your bank (which I suspect the vast majority of Americans do), there is really little to worry about.