Spread Your Money Among Several Banks To Stay Fully Protected

BOSTON -- On Monday morning, customers of the failed IndyMac Bancorp Inc. lined up at the thrift's retail branches to withdraw their hard-earned savings, rather than leave it in an institution that was being taken over by the Federal Deposit Insurance Corp.

It was too little too late, closing the barn door after the horses were gone. And their reaction was completely unnecessary.

The biggest irony of IndyMac's failure -- and it was the nation's second-largest independent mortgage lender and the seventh-largest savings and loan -- was that the branches had big signs telling customers "You can count on us," when in fact the only thing those consumers could rely on ultimately was the promise of FDIC insurance.

While it's understandable that consumers would want to get their money out of a failing bank, experts suggest that there is no real reason to make such a move, provided you fall under FDIC protection guidelines -- specifically holding no more than $100,000 per individually registered account.

(If you have two certificates of deposit in your name at the same institution and each is worth $75,000, you have exceeded the protection limit; if one was registered in an individual name and the other was registered jointly, however, the total amount would be protected because neither registration has exceeded the coverage limit.) See related story.

Show and tellers

When regulators stepped in last Friday, IndyMac customers experienced a brief disruption in the ability to get their money. While automated teller machines were working, they also capped the amount that a shareholder could withdraw electronically, limiting it to a few hundred bucks.

That's why customers had to wait around for Monday morning's opening to rush the bank and ask for their cash back.

By then, of course, they had full access to their money, up to the protection limits. If they had balances above the insured level, they could only access up to $100,000, with the rest being frozen until regulators sell IndyMac and see what's left. While the best-case scenario is full restitution and the worst case is a total loss, the truth is likely somewhere in the middle. That means months of foregone interest and lost opportunity, but not necessarily a big loss in principal.

"People rush to the banks out of an irrational fear," says Greg McBride, senior financial analyst at BankRate.com. "Only depositors who had an exposure more than the $100,000 limit really have to worry, because they are going to be standing in line waiting for a payout."

That's important to remember, in light of reports suggesting that the Federal Reserve has almost 100 banks on a "watch list" of potential candidates for the next bank failure/takeover. The list hasn't been released -- because it would spur a run on those institutions -- but analysts are quick to say they do not believe IndyMac was an isolated failure. Things will get worse before they are cleared up.

Safe deposits

As a result, McBride noted that anyone with accounts that top the deposit insurance limits need to remedy that situation now, either re-titling accounts or moving money to stay safe. At a time when some of the biggest financial institutions are in trouble, it may be better to diversify your safe havens -- spreading money into several banks or thrifts -- rather than letting it build in one place, even if it's earning a higher rate of return.

"It's like driving without a seat belt," McBride says. "You have this tool to protect you -- FDIC coverage -- but you drive around without using that protection, figuring it will be all right. And it is, right up to the point where there's an accident. ... Right now, there are a lot of accidents waiting to happen. It's easy to buckle up, and people ought to be doing it."

For consumers who are caught up in the anticipated wave of regulatory takeovers, bailing out after the news surfaces won't make much difference good or bad. There are new checks to buy and any new account fees to be paid if you move your money to a new bank, but that's a small price to pay for the peace of mind from knowing there won't be even a moment when the bank that is supposed to be safeguarding your nest egg is meeting with regulators.

In reality, the only reason to run to your bank is to protect yourself in case the institution fails -- not to get your cash back once failure has happened.