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Fear drives savers during bank crisis
Analysts say rumors, withdrawals harm financial institutions
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James Glover II / Star staff Joseph Anthony was able to withdraw about $100,000 of the $350,000 that he has at IndyMac Bank in Ventura. The FDIC recently took over IndyMac.
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More from County NewsJoseph Anthony, 80, of Ventura thought he was set for life after following the money-management rule of save, save, save.
Now, he is panicking about possibly losing $240,000 after the collapse and federal takeover of IndyMac Bank. He lined up July 14 to withdraw about $350,000 he has at the bank, but was told he could take only about $100,000 — the maximum amount insured by the Federal Deposit Insurance Corp.
"I'm worried sick about the $240,000," he said.
His fear is so intense that he's scrambling to get his money from accounts at other banks he thinks might be in trouble, despite suffering hefty fees for early withdrawals.
Like so many bank customers, he has started hunting for a safe place to park his cash. But that's an uphill battle — there are more than 90 banks on the FDIC's watch list.
Last week, he stood outside a bank in Ventura, about to withdraw his funds. Faced with a $12,000 penalty, he said he'd rather move the money than risk losing more.
Worried about precipitating a panic among the bank's customers, he did not want to disclose the name of the bank.
This kind of tiptoeing could become more prevalent since IndyMac crumpled, which some people blame on Sen. Chuck Schumer, D-N.Y., who publicized a letter he had sent to the Office of Thrift Supervision and the FDIC last month, warning the bank could collapse.
"It's an emotional time, a time of uncertainty," said Jamshid Damooei, professor of economics at California Lutheran University.
Industry distress has been magnified since stocks for mortgage giants Fannie Mae and Freddie Mac plunged, spawning speculation of a possible government takeover, which the Bush administration rushed to quell.
Making things worse for IndyMac are the large number of people who have withdrawn funds — both above and below the insured limits — which will reduce the assets that the FDIC will sell at fire-sale prices, said Tom Neuhaus, in-house counsel and executive vice president for Pacific Oaks Federal Credit Union.
Similar to what other financial institutions have reported, Neuhaus said a significant amount of new and current credit union members were moving accounts from IndyMac last week.
It's understandable that bank customers are concerned and stressed, analysts say.
But withdrawing funds from IndyMac or other banks rumored to be troubled could cause more harm than good, said Marcee Yager, a certified financial planner and president of Financial Vision LLC.
"The fear of loss completely overwhelms our ability to gauge the possibility of loss," Yager said.
By paying large penalties for withdrawing their funds, depositors are harming themselves by irrationally trying to protect themselves, she said.
According to David Barr, FDIC spokesman, "IndyMac is the safest bank in the country. It's got the FDIC standing behind it."
Try telling that to furious IndyMac customers who have reported numerous complaints: having thousands of dollars missing on online statements, receiving checks for less than the insured amounts, and having holds placed on accounts.
Tell that to Anthony, who is waiting for his case to be reviewed by the FDIC to determine if his beneficiaries have been properly named.
Since IndyMac has been taken over, the FDIC has had little time to reorganize, but its customers' funds aren't safer anywhere else, Yager said.
Though she says she understands the concern people have if depositors have accounts that exceed $100,000, she believes "people should do their homework ahead of time" and ask the right questions.
When creating accounts, customers should treat banks as advisers, said Leland Chan, general counsel for the California Bankers Association. Ask about the bank's soundness and how it diversifies assets and manages risks, he said.
Banks should be truthful, Chan said. But in some cases, they're not. Just days before IndyMac buckled, Anthony sat down with a bank official, concerned about renewing his certificate of deposit, or CD, after hearing the bank was in trouble. He says he was assured of the company's vitality and told his money was safe.
"While IndyMac's demise is unfortunate, the banking industry as a whole is really extremely strong," Chan said, adding that the panic among depositors is unwarranted. The industry has not become weaker by one bank's failure — what matters is an individual bank's safety and its capital levels, he said.
As of March, capital levels were at a historic high. The industry held $1.36 trillion in capital, in addition to roughly $121 billion in reserves, the FDIC reported.
"I can understand the kind of concerns that people have," said Damooei, the CLU professor. However, he noted the concerns stem from not grasping the protection that exists. Most banks have FDIC insurance.
Still, if his CD were up for renewal with an ailing bank, "I'd probably be prompted to take it out. It's a personal case."
If a bank is in trouble, it doesn't mean it will be liquidated, he said. Troubled banks could be merged or receive an injection of capital — it doesn't necessarily mean it will be on the auction block, Damooei said.
The giant national banks are highly unlikely to fail, because there's no way Congress would let that happen, he added.
"They're too big to fail," he said. "The system is in trouble, but the government is out there to support the banks."
Damooei advises depositors to spread their savings so they don't have accounts that exceed $100,000.
"The solution is not to put your money in the freezer or build a hole in the backyard," Damooei said.
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Posted by live_for_purpose on July 22, 2008 at 5:31 a.m. (Suggest removal)
I find it incredibly unbelievable that someone who is 80 years old (my parents are both 74) and lived through the Great Depression) would EVER put more than $100,000 in any one bank, due to the lack of FDIC insurance past $100,000! Where is his God-given common sense and the wariness of life experience of having lived through the Depression? I just don't get it. Pure foolishness.
I had a friend from college who worked at a hospital back in the early 1990s and she did their investments and said she shopped the country and put $90,000 in CDs in each good bank she found. I asked her why $90,000 and not $100,000? She said that way just in case of a bank failure not only did they not lose any principal, but also no interest. Very prudent indeed.
Older people (at least my folks) are usually very prudent with their money. The time to get nervous is before you allocate your money, not after you allocate it. My guess is these people were getting higher interest rates at Indymac (I know because I've checked bankrate.com before and they had very competitive rates) and were greedy to chase higher rates, especially in a generally low rate environment. Very short sighted!
Posted by pific on July 22, 2008 at 8:01 a.m. (Suggest removal)
It's ammazing that typical, honest citizens are mugged/robbed by thugs and now banks. When an honest person puts his money into savings, accounts that exceeds 100g's, and banks do not tell you they are in trouble, I think those officials should be brought before the law. I have no respect for those institutions.
Posted by moorpark118 on July 22, 2008 at 8:59 a.m. (Suggest removal)
He did not say he lost the money, just that he has to provide FDIC with supporting documentation. If he set up the accounts correctly he will get all his money AND intrest.
Some people did lose money but most did not. The ones I have spoken with are just waiting for FDIC to review their account and then they will be paid 100%.
Bottom line is it is free insurance if you take the time to set up the accounts correctly. If people took the time to do so, or at least spent the same amount of time structuring the accounts as they did finding the best rate they would be fine. Not making excuses for the bank just that people need to put in a little effort to protect themselves.
God knows the retired people have the time. (not a cut, just the fact)
Posted by incgnta on July 22, 2008 at 9:16 a.m. (Suggest removal)
"there are more than 90 banks on the FDIC's watch list"---so where is the link to the list?
Posted by sirdvsdsw on July 22, 2008 at 9:25 a.m. (Suggest removal)
Most people deposit over the FDIC insured amount because they are trying to earn as much intrest their money can earn them, the more you deposit the more you get back. Its a gamble...todays CD rate may be the highest all year, maybe next noth will be higher....we dont know.
The FDIC insures up to 100,000 per beneficiary, two names on an account equals $200,000 FDIC insured coverage. Even greater for certain IRA'S.
Posted by bugmenot on July 22, 2008 at 9:26 a.m. (Suggest removal)
incgnta, it's estimated there are 90 banks on this list. We don't know because the FDIC keeps it a secret.
Hearing stories like this, although quite naive of this gentleman, really piss me off. These banks are a racket.
Posted by bugmenot on July 22, 2008 at 9:27 a.m. (Suggest removal)
http://www.fdic.gov/bank/individual/b...
Posted by bugmenot on July 22, 2008 at 9:41 a.m. (Suggest removal)
sirdvsdsw, is there a different tier on interest rates when you are over a certain amount? Sounds like a weird practice if so. If not, then you'd accrue the same interest in multiple CD's so long as it totals the same amount.
Posted by YaILiveInSimiSoWhat on July 22, 2008 at 10:03 a.m. (Suggest removal)
I don't think it was very smart to tell the whole world this mans age, full name, where he lives and that he took out all of his money and doesn't know where to put it yet.... stuuuppiiiiid
Posted by sirdvsdsw on July 22, 2008 at 10:49 a.m. (Suggest removal)
banks can give a lil perk for depositing more money, ive seen it plenty of times. Catch a branch manager in a good mood and you can get .5 increase on the going interest rate for putting in a couple extra thousand. CD's can mature in 3, 6, 9, 12, and 18 months. Usuallty the longer you leave the money the better the interest rate.
Lets say you have $145,000 to invest in CD's. Bank #1 gives you an interest rate of 4.0 and Bank #2 is offering 3.5. You deposit $95,00 of it there so you can protect your money and accrued interest and the other $50,000 in bank #2, you just ripped yourself out of .5%. Most people want that .5% and want an insentive for depositing the extra $45,000. But like I said its a gamble...
Posted by bugmenot on July 22, 2008 at 10:57 a.m. (Suggest removal)
sird, good to know about the bank manager.
I always thought banks A, B, C would give out an interest rate of X at all the banks. X would be determined by the Federal Reserve. I didn't know Bank A could give an interest rate of X and Bank B or Bank C may (or may not) give out an interest rate of Y.
Posted by sirdvsdsw on July 22, 2008 at 11:10 a.m. (Suggest removal)
This is not the case all the time but banks that give out the best interest rates are not the best banks. Think about it, if bank A is doing great and is not in need of deposits they will not be looking to offer more money to give out (higher interest rates), bank B who is in need of cash deposits will offer better interest rates because they need your money to do business. They will have to pay out there higher interest rates but they stayed afloat and have another chance at profiting. They are also hoping you miss your grace period in which you are allowed to close your CD, miss your 7 day window and guess what...they have your money for another 3 months at there going rate for a 3 month CD, and not what you originally opened it with. if you elect to take it out expect a penalty.
Posted by bugmenot on July 22, 2008 at 12:31 p.m. (Suggest removal)
make sense sird, those sneaky SOB's.
Watch out for Wachovia.
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