James,
I wrote you a month or two ago regarding a post of yours that was concerned about failing banks. I commented that I thought the worries were overblown – there was no reason to think that FDIC wouldn’t pay off the claims, just as FSLIC paid off the claims in the 1980s. I still think that’s true, but I have had a personal cautionary experience that has moved me much closer to your way of thinking.
I had a brokered Certificate of Deposit (CD) issued by IndyMac. (In case you post this, for readers unfamiliar with the term, “brokered” mean I bought it through a broker, like a bond or stock. Banks that want to raise a lot of money aggressively issue brokered CDs to attract “hot” money, money that flows in quickly and can flow out just as quickly; FDIC doesn’t much like such CDs, for obvious reasons.) It had a few months to go when IndyMac failed. FDIC announced that they would honor the terms and rates for non-brokered CDs, but would simply terminate brokered CDs and return principal and interest up to the day the bank failed to the owners.
So that’s problem #1: FDIC just made up the rules as it went along. Why was my CD different from others? Because they said so, pure and simple. They would claim it’s for the overall good, because it discourages brokered CDs, which can make banks more prone to runs, but that doesn’t help me, does it? And it’s not like they had announced this ahead of time. So I lose money, and there’s no way I could have known to avoid it. (IndyMac wasn’t on their trouble list when I bought the CD.)
Problem #2: not only didn’t the money show up in my brokerage account right away, I couldn’t even find out when it would show up. It was more than two weeks before it appeared, and I got no interest for that time.
Neither problem was significant in this instance; it wasn’t a big CD and it didn’t have much longer to maturity, and the delay wasn’t very long. But it was a powerful experience in terms of opening my eyes to what might happen under greater financial stress. If FDIC can delay returning the money for two weeks with no interest, they can do it for two months, or however long they need to. Clearly, beyond the basic insurance act of eventually returning money earned up to the date of bank failure, everything else is up to the FDIC’s whim. That doesn’t give me a good feeling.
The best way to avoid this is to choose strong banks. One resource I’ve found useful in the past is thestreet.com ratings. This used to be called Weiss Research, and they are clearly an independent source of analysis of bank strength and safety. Their home page says: “We don’t accept compensation from the companies we rate for issuing the rating. Nor do we give the companies an opportunity to preview the ratings or suppress their publication if they’re unfavorable. We are totally independent and unbiased because our loyalty is to you — the customer.”
If you go to The Street.com’s Rating Page and select Banks and Thrifts, you can then type in the name of a bank you want to check, and click Go. They will list the matches, with letter grades from A+ on down. You can then click on a bank name and download a more detailed report, but for my purposes the letter grade has been enough to tell me whether I’m about to make a mistake. Keep up the good work! – Michael A. in Seattle