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EverydayInvestor (< 20)

Are your deposits insured? How to avoid losing money in the coming bank armageddon

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June 20, 2008 – Comments (17) | RELATED TICKERS: NCC.DL2 , WAMUQ.DL , WB.DL2

I am not one to use the term armageddon lightly. But when major banks like National City (NCC) and Washington Mutual (WM) are trading under 30% of book and Wachovia (WB) is trading at under 50% of book value, what othe term is appropriate? The market is pricing in a fair probability of a number of very large banks being bought out at firesale prices (like just happened to PFB) or being taken over by the FDIC and then being dismantled.

That being said, while the coming two years will be a very bad time to own bank stocks or bonds or to have uninsured deposits at banks (over the $100,000 FDIC limit), the economy will not completely collapse (though we should have a decent recession) and the world will move on.

The main thing to do is make sure that you and any friends and relatives never have more than $100,000 at any bank. If you wish to keep more, you may want to visit the FDIC website to see if your type of account is protected for more money (some are). You can search for your bank here and find out if it is insured by the FDIC and you can view financial information on your bank, even if it is private. For example, try searcing for "Home State Bank NA" in zip code 60014* (see random note at bottom of post). Then click on "Last Financial Information", and on the next page click on "generate report". This brings you to the bank's balance sheet. If you click on the link towards the bottom for "past due and nonaccrual assets", you will be taken to the good stuff. You can see that past-due loans have more than doubled over the last year. Unsurprisingly, much of the increase ($2.5m) was from "construction and land development loans". It also pays to note that this big increase in past-due loans was solely in the 30 to 89 days late category. A more agressive bank might still be accruing interest on those loans. However, this is a conservative community bank and as you can see towards the bottom of the page, all loans that are more than 30 days late are non-accrual. (An interesting discussion of regulatory vs. tax requirements for deciding which loans are non-accruing can be found here.)

If you go back to the main balance sheet page and click on "net loans and leases" you can find the breakdown of loans. This is a good place to find out how risky your bank's loan portfolio is. Unfortunately for Home State Bank, 20% of their loans are construction and land development loans. This bank is based in the far northwest exurbs of Chicago, so I think it likely that the bank will take a huge hit here. If you click on "1-4 family residential" you can see the breakdown of these loans. Luckily, most of these are first mortgages. Overall, Home State Bank looks okay. What about your bank? 

If you have accounts as a credit union, visit NCUA to see details on insurance of your deposits. You can find your credit union and then request that a financial report be emailed to you. As an example I uploaded the report on my credit union. You can download the Excel Spreadsheet here. When analyzing credit unions, be aware that they will generally have more real estate exposure than similar commercial banks. Important things to examine are delinquent loans as a percent of assets (sheet 2, line 21 in the spreadsheet), asset mix including the amount of REO (sheet 4). If you are afraid of a bank run sparked by articles similar to this, take a look at the amount of uninsured deposits (sheet 5, lines 46-50). Delinquent loan info is always interesting (sheet7). For most of the data in the spreadsheet, an average of peer group credit unions is provided as well, making comparison easy. Overall, I think West Community looks quite safe.

What should you do if your bank doesn't look safe (such as National City, where I have multiple accounts)? First thing that you should do is make sure your deposits are insured. Then make sure that you have enough cash in safer banks so that you can last awhile if you temporarily lose access to your money. Up until now the FDIC has been very good at getting depositors quick access to their insured deposits at a failed bank, but if things get really bad and big banks go down the FDIC could become backed up and take weeks or months to grant depositors access to their money. It pays to be prepared for such a scenario, even if it is unlikely.

Robert Oppenheimer - "Now I am become Death, the destroyer of worlds."

*This bank, by the way, provided me with my first mortgage. Easiest mortgage I ever got -- my father and I ran into Steve Slack, the bank president, while dining at the local country club, and I mentioned that I was buying a house in St. Louie. Slack gave me his card and told me to give him a call when I get close to finding a house. There are benefits to relationship banking--my extended family has banked there for three generations and uses the bank for a family company.

Disclosure: I am short several regional and local banks. I am currently short SSBX, DSL, FED, and SNV. Today I halved my positions in FED and SNV.

17 Comments – Post Your Own

#1) On June 20, 2008 at 1:47 PM, ATWDLimited (< 20) wrote:

Don't forget the FDIC, or Federal Deposit Insurance corporation only holds 1/2 of 1% of the money it insures, and and is real just counting on  a Fed bailout. The truth be told, even the Federal Reserve would have trouble expanding the money supply by that much, so the two choices are hyperinflation and a messed up long term or messed up banks, and a collapse of the system today.

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#2) On June 20, 2008 at 2:27 PM, TDRH (99.72) wrote:

Great advice.    I remember when a lot of the savings and loans failed in the late 80's/90's they were interviewing people who lost money on guaranteed depsosits.    Number one, I did not understand why anyone would have over 100,000 earning such a low rate, and number two why people did not know the limits of the FDIC, but there are a lot of individuals out there who are highly productive and intelligent but spend no time managing their assets.

Wish I could rec this more than once for you.

 

 

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#3) On June 20, 2008 at 3:14 PM, EverydayInvestor (< 20) wrote:

James, I bet a lot of older folks do that because they don't want to risk their money in stocks or even bonds. I know my grandparents (around 80yo) have a lot of money in CDs. However, they should be okay because they ladder CDs and always switch around banks to find the best rates.

 

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#4) On June 20, 2008 at 3:20 PM, EverydayInvestor (< 20) wrote:

In failing bank news, how about FED's 8k filing today? In the last month alone their NPLs (non-performing loans) have gone up by $71.2 million.

From their 10Q, their book value as of March 31 was $586.8 million. So in one month, loans equal to 12% of their book value went non-accrual. This is just insane.

Disclosure: I am short FED and other banks (see above).

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#5) On June 20, 2008 at 4:26 PM, abitare (78.94) wrote:

I might go a step further and recommend that you have some deposits outside of the US or use Everbank, where you can denominate savings in gold or another currency.  If you are paid in dollars, you retirement is in dollars, a hedge is to have money in another currency.

The dollar is in trouble, the FED is in trouble, FDIC may not have the reserves for the crisis that is building.  

What is coming resembles the first great depression or very severe recession. In the 1930s the dollar was exchangable for gold and citizens kept gold and silver in safety deposits boxe, which were confiscated. If you want to protect your wealth, you might want to see about getting some denominated in another currency. 

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#6) On June 20, 2008 at 6:00 PM, EverydayInvestor (< 20) wrote:

The borrow got expensive on SNV so I closed my short of it this afternoon. It still has farther to fall, I believe. SSBX and DLS jumped up big towards the close.

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#7) On June 20, 2008 at 6:21 PM, eskatonic (29.22) wrote:

even if you are covered by fdic, it still takes time and hassle to get your money back.  its not like the bank fails on friday and monday you get the monkey suit "I'm from the government and I'm hear to help you" on your doorstep with all your cash.

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#8) On June 20, 2008 at 7:11 PM, EverydayInvestor (< 20) wrote:

Actually, eskatonic, that is how it usually works out. The WSJ had an article on this a month ago. I've linked to it before; I won't do it again. They come in on a Friday at close, look over the books, and then Monday it opens as a branch of a bank that buys most of its assets. The bad assets go to the FDIC, but most of the assets are bought buy an acquiring bank that also takes on all (or many) of the branches. So most of the time there is no delay.

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#9) On June 20, 2008 at 7:34 PM, anchak (99.85) wrote:

Michael....very very good post....also I think may not be a bad idea to cover equity/brokerage assets also ...obviously they are subject to market volatility but at least you have some protection if the brokerage company fails....

http://www.sipc.org/

Actually start here

http://www.sipc.org/claim/claimsprocess.cfm

Personally I am so dismayed with institutions crumbling because of greed. Wachovia is priced for bankruptcy - there's a valid reason. Its not certain - but there California Subprime acquisition is laying some nice napalms now. 

Thanks for the FED link - its becoming a little difficult to keep track. I was trying to evaluate yesterday whether FITB would come back - I desparately wanted to believe so. Today there was an upgrade on  the stock - I am truly not sure.

 

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#10) On June 20, 2008 at 9:13 PM, EverydayInvestor (< 20) wrote:

With regards to brokerage accounts, if you are very nervous about your broker failing you can always set up a trust account through a bank. The bank would maintain custody of the assets and even if your assets were above SIPC limits (generally $500k, although only $100k in cash is covered) you would lose no money if the broker failed. However, such custodial accounts can be expensive. If you don't have multimillion dollar brokerage accounts that is not a good idea.

Otherwise, the best thing to do is to track the health of your broker. Using Interactive Brokers as my main broker allows me to do that because they are a public company. It would go without saying that E*trade, TD*Ameritrade, or any other broker with serious banking assets or owned/affiliated with a bank is riskier than a pure broker. My favorite broker for long-term investors, Scottrade, is a good, conservative bet.

Of course, for most of you this should not be much of a worry because you have multiple accounts (IRAs, 401ks, taxable accounts), and 401ks are usually through a different broker because that is set up by your company.

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#11) On June 20, 2008 at 9:14 PM, EverydayInvestor (< 20) wrote:

Oh, and for those of you that index a good chunk of your money, invest directly through Vanguard. This will further spread out your assets and reduce fees that you would pay if you bought their funds through a standard broker.

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#12) On June 20, 2008 at 11:14 PM, anchak (99.85) wrote:

"invest directly through Vanguard" - best advice around for long term investment. Michael my favorite fund is VTRIX - International Value. I think you are looking to put in some more - would appreciate if you would annouce here.

I think I am personally OK vis-a-vis brokerages ( i am a puny customer - this is my ideas account - ie a place where I give a big chunk of money to the house in fees, hoping to learn a lot in return. Complete antithesis of indexing)  - but I have a few friends - who have their Company stock etc thru E-trade and TD. Makes things dicey.

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#13) On June 20, 2008 at 11:43 PM, EverydayInvestor (< 20) wrote:

anchak - tell those friends that the great one forbids them from owning company stock. THUS SPOKE EVERYDAYINVESTOR. Seriously, I will never buy stock in my wife's company or any of its competitors -- that is antidiversification.

Because I trade for a living (or at least I am trying to), I keep all my investments in my brokerage account; I had a Vanguard account but closed it to consolidate my assets. I hold a number of broad index ETFs and then use margin and a bit of cash to trade. Sorta like portable alpha. I've listed my favorite ETFs before.

I suggest taking a look at my ETF Asset Allocation Plan for Everyone. Great post and reading it can literally save you thousands of dollars (by making a financial planner or stockbroker unnecessary).

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#14) On June 20, 2008 at 11:45 PM, EverydayInvestor (< 20) wrote:

Imagine me speaking just after the following music when I tell your friends not to own company stock:

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#15) On June 23, 2008 at 3:20 PM, anchak (99.85) wrote:

There's a small little thing called deferred compensation - you dont have a choice - with company stock that is.

You are preaching to the choir as far as not holding Company stock in Retirement assets ( 401K,IRA etc)

Oh BTW the DFA ( Indexfunds , I think) 12 step book is available free...you just need to sign up. And they will provide you with your allocation - based on risk tolerance - Here I am referring to the blog link Michael provided.

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#16) On June 23, 2008 at 4:03 PM, EverydayInvestor (< 20) wrote:

Yep. You can get the book free at the Index Fund Advisers website.

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#17) On June 27, 2008 at 10:38 PM, EverydayInvestor (< 20) wrote:

I posted this article on my other blog (goodevalue.com) and I got this angry response from a banker:

"wow…you really don’t know what you are talking about. Sorry for the sarcasm but I think you need to be a little more realistic. Banks are not going to be dropping like flies, and I would like you to articulate the last time an uninsured depositor lost their money before indicating you should not have over $100,000 in any institution. First Integrity Bank in Staples, MN was recently closed by the FDIC.

Did uninsured depositors lose money? No.
Was there difficulty in accessing funds? No.
Was it a seamless transition to the new owners? Yes.
Did the FDIC know what they were doing and have it planned weeks in advance? Yes.

Please provide more facts to support your assertions.

*As a disclosure, I work for a community bank. A real estate bank, and we are doing quite all right. Are margins tight? Yes. Are there more asset quality issues? Yes. But that brings more blocking and tackling and less business development. I think you are over reacting. Usually there are unusual circumstances that create the bank failure.

If you are getting in the market now, it is not a good time to short banks, the risk return is not there right now. You missed the boat…"

To that I replied the following:

Even if an uninsured depositor receives all their money, it is likely that they will have to wait to get access to it. While some failed banks have all deposits (even non-FDIC insured deposits) transferred to an acquiring institution (like the bank you mention), it is not uncommon to have to go through the FDIC claims process (as with banks #2 (ANB Financial) and #4 (Hume Bank) on the FDIC failed bank list. In that case, uninsured depositors had to file claims with the FDIC.

Oh, and this Marketwatch article lists two recent bank failures where some uninsured deposits were lost. These were Netbank, where 30% of uninsured deposits have not been paid, and Miami Valley Bank of Ohio, where only 94% of uninsured deposits have been paid (these data are from February).

This recent balance sheet for Netbank indicates that there will be real losses for uninsured depositors. Same thing for Miami Valley Bank.

Are you still so sure that I am uninformed? It is simple for depositors to spread money out across accounts to minimize their risk and ensure that all their deposits are FDIC-insured. Arguing as you do that losing uninsured deposits is “unrealistic”, is wrong and it discourages people from acting in a prudent manner.

 

 

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