Is your bank safe?
* The collapse of IndyMac has banks in customer-reassurance mode
By Avi Salzman
Nothing says hard times like people standing outside a bank demanding their money. IndyMac Bancorp’s (IDMC) failure and the resulting chaos were reminiscent of depression-era bank runs even if the country’s economic condition doesn’t marginally resemble that era. But in an economic slowdown with few visual reference points—what does a subprime loan look like anyway? IndyMac’s failure carried a clear message for some: Stick your money under the mattress.
Banks and federal officials have worked diligently in recent days to make images of bank runs vanish. Some banks are now issuing tellers talking points to use to reassure customers that their money is safe, housed by an institution that is well-capitalised. BankAtlantic, a Florida-based regional bank, even sued an analyst after he pegged its parent BankAtlantic Bancorp (BBX) near the top of a list that could be ‘next’ after IndyMac. “A falsehood, when widely circulated, becomes its own truth,” the bank’s lawsuit says.
But critics contend that a dearth of information will only make customers more suspicious and open the door to dangerous rumours. Since IndyMac’s failure, everyone from Treasury Secretary Henry Paulson to bureaucrats at the Federal Deposit Insurance Corporation (FDIC) have hit the media trail to reassure depositors their money is safe. Their chief message is built on the federal guaranty behind every deposit up to $100,000, even in cases where a bank collapses. Joint accounts, retirement accounts, and trusts are also insured, up to a limit.
Insurance limits last raised in 1980
To be sure, far fewer banks are in trouble these days than during past downturns. Despite a wave of bank write downs that have so far topped $400 billion to date, only seven banks have failed in 2008, compared to the hundreds that failed during the late 1980s and early 1990s. In 1990, about 10 percent of the 15,000 FDIC-insured banks were on the agency’s problem list, compared with only about 1 percent today, FDIC spokesman David Barr said. But that doesn’t mean there’s no cause for concern. Many more people now have deposits that are above FDIC-insured limits, meaning that if their bank failed they might get only a portion of that money back. In 1991, 82 percent of deposits were insured, according to FDIC estimates. The $100,000 insurance limit hasn’t been raised since 1980. Today, only about 62 percent are insured.
Feds asleep at the switch?: For the vast majority of IndyMac customers, withdrawing their money made little sense. Only about 5 percent had deposits that were not insured, says Barr, the FDIC spokesman. But bad news tends to cascade, and once the run began it gained momentum. Regulators and bank officials placed much of the blame on Schumer and his “interference in the regulatory process.” Schumer pointed his finger in the other direction, saying regulators sought to “blame the fire on the person who calls 911.” “The breadth and depth of the problems at IndyMac were apparent for years and they accelerated in the last six months,” Schumer said in a statement. “But the OTS was asleep at the switch and allowed things to happen without restraint.”
Wachovia says it’s all right: Stearns said he thinks Bove’s report gained prominence in part because the FDIC’s list is secret and people are hungry for information. “Because he was the only one to step up when the FDIC wouldn’t list the banks that are in trouble, this story was repeated over and over,” Stearns said. Data on banks can be hard to come by. Mark Fitzgibbon, a principal at investment bank Sandler O’Neill and Partners, published a report on July 15 about US banks with the most ‘jumbo’ deposits, which have a $100,000 minimum and are less likely to be covered by FDIC insurance. Within days the firm called it ‘outdated’ and would not release it. Fitzgibbon did not respond to several requests for comment; the firm declined to comment.
Indeed, anxiety is high in the industry. Many banks have started their own campaigns to reassure customers that they’re not going anywhere. Wachovia’s (WB) new president and CEO, Robert Steel, is featured in a video on the company’s Web site aimed at bank customers. “Although the nation’s financial news lately has been a bit troubling and Wachovia certainly isn’t immune, I want you to know that our company is on exceptionally sound footing,” he says. Steel goes on to list the bank’s capital ($50 billion), liquid funding capability ($150 billion), and says the bank has enough cash to meet its current long-term debt obligations for three and a half years. “My point in telling you all this isn’t to brag or illuminate issues in the overall economy,” he said. “I want you to know that Wachovia is ready to do business.”
Deposits don’t move often: Because comprehensive FDIC data have not been released since the IndyMac closing, it’s too early to tell which banks are seeing more deposits and which are seeing fewer. In general, it’s rare for an average retail customer to move deposits around much, in part because it takes time and often costs to set up an account at a new bank, said Derek Ferber, an analyst at SNL Financial.
But even as banks try to reassure their customers, they are competing with increasingly vocal skeptics. Lists of troubled institutions continue to proliferate on the Internet. Aaron Krowne, a 28-year-old from Atlanta, started a series of blogs in 2006 called Implode-o-meters covering various industries, including hedge funds, mortgage lenders, and banks. Krowne, who has a background in computer science, considers himself an “armchair economist,” but he partners with more established industry experts to compile the lists. He hopes the sites become the base of a successful media company. On Krowne’s Bank Implode-o-meter, he lists the failed banks and credit unions. Next to them is a list called “Writedown, Rundown, and General Distress” listing banks that could be in trouble.
Krowne contends the banking and mortgage industries have not been telling consumers and investors the truth, and his job is to “put some counterspin on it.” His mortgage site was sued after it posted an e-mail from a whistleblower, but the bank site “hasn’t received even a single nasty-gram.” He said he does not claim banks are insolvent, and just highlights their trouble spots. Ridout, of Consumer Action, says such sites are subject to rumor and innuendo, but adds that Krowne’s bank-monitoring site proved prescient on IndyMac, spotlighting troublesome signs well before the bank was seized by regulators.
So which bank will be next to fail? “I do have a sense but I can’t tell you,” says Krowne, adding that because then I would be spreading panic.