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10 Lessons from the 2008 Bank Failures

The financial crisis became serious this year as we saw breakdowns of major institutions like Fannie, Freddie, Lehman and AIG. It was stressful for bank depositors as major banks collapsed. However, the FDIC did its job to protect depositors. In 2008 there were 25 official bank failures. Since we'll likely see many more bank failures in 2009, I thought it would be useful to review these closures from the point-of-view of a depositor. So I looked back at my posts of this year's bank failures and put together this list of lessons that can be learned.

1) Banks of all sizes can fail. WaMu was the largest bank that failed this year, and the largest to ever fail in the U.S. WaMu had assets of $307 billion and deposits of $188 billion. The smallest bank that failed in 2008 was Hume Bank in Missouri. It was the second bank of 2008 to fail. It had $18.7 million in assets and $13.6 million in deposits. As a comparison, WaMu had more than 16,400 times more in assets.

2) When most banks fail, the FDIC has another bank assume insured deposits which allows customers to continue accessing their insured deposits. This happened for all of 2008 closures except IndyMac. In that case IndyMac was reopened as IndyMac Federal Bank under the supervision of the FDIC.

3) There's likely nothing to gain to rush to your bank when it fails. After IndyMac Bank failed, not only were there long lines outside of IndyMac offices, there were people who flew to Los Angeles to get their money. Some understanding and faith in the FDIC would have saved them time and money. The FDIC continued paying interest on the IndyMac accounts. It also pays to get internet access to your accounts. I was able to log into my IndyMac account on Monday after the closure without any problems.

4) Principal and accrued interest are insured up to the day of closure. Interest is added to the principal to determine the insured amounts. If the added interest causes the total balance to go over the insured amounts, that amount is at risk. A reader reported having this happen to his deposits when ANB Financial failed. His $400,000 initial deposit was fully insured. The $15,000 of interest that he had earned was not.

5) You can increase your deposit insurance above the basic level (currently $250,000) at one bank through different ownership categories (see FDIC webpage). The two most common ownership categories for this purpose are joint accounts and revocable trust accounts, such payable-on-death (POD) accounts. With POD accounts, you have to be careful that you meet the FDIC requirements. The one requirement that banks often get wrong is the account title. A reader who had over $400,000 of deposits in the failed bank ANB Financial described how glad he was that he had insisted on the correct titling of his CD.

6) When a bank fails, the new bank that takes over the failed bank can decide not to honor existing rates on the failed bank CDs. This happened when Alpha Bank & Trust Bank failed, and Stearns Bank took over. A reader reported that Stearns Bank lowered the 12-mo CD rate from around 5% to 1%. The reduction was made at the day of closure (10/29). He didn't receive the letter about the change until 11/12.

7) When you buy CDs at a brokerage, they're FDIC insured, but it can take 4 or more weeks for depositors of brokered CDs to get back the money at a failed bank that was holding the CD. This occurred after ANB Financial's closure)

8) Good deposit deals can continue after a bank fails. This happened for both IndyMac and WaMu when high-rate CDs continued for one or more weeks after the failures. During this time, the CDs were opened under the new banks (Chase Bank in the case of WaMu and the FDIC in the case of IndyMac). This provided a good opportunity to get a great CD deal at a strong bank.

9) All-Deposit Transfers became a common term. When the FDIC arranges for another bank to take over a failed bank, the new bank will sometimes assume all deposits, not just the insured deposits. In these cases, all deposits, even those above the FDIC insured limits, are transfered. All-Deposit Transfers occurred when WaMu closed, and it occurred at many banks that were closed in 2008. However, there were several cases in which non-insured deposits were not completely covered. IndyMac customers who had over the FDIC limits only received 50% of their non-insured deposits immediately after the closure.

10) Most banks are closed by regulators on Friday afternoon, but there was one exception in 2008. That was WaMu, which was closed on a Thursday.

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  |     |   Comment #1
Very useful summary. Thanks and Happy New Year.
  |     |   Comment #2
Good summary Banking Guy. Thanks. And I certainly agree with #8 in particular.

I made money this year trying to position myself "on the bubble" one step ahead of the FDIC and/or Paulson. I hit it a few times, buying CDs at bailout targets just prior to their demise, takeover, reorg, etc..

The one where I might have messed up is Corus Bank. They have my money and I sure DON'T want it back at this time. I had thought they would get a bailout but AFAIK it has not happened yet. Oh well, you can't win 'em all. :-) And the remainder of my CDs are all in (what are today) fairly stable settings.
  |     |   Comment #3
With #3, the only thing I have issue with is the use of the term "faith in the FDIC."

A better word would be trust.

Faith is the deliberate suspension of disbelief.
  |     |   Comment #4
Banking Guy, you are awesome!

I totally agree with #3. I now have a lot of faith in FDIC. I was really surprise to get my full amount (principle and interest) back after FDIC took over IndyMac. FDIC even paid me one week of interest while they process my CD account.
  |     |   Comment #5
If you saw the movie "It's a Wonderful Life", you are well aware about the bank run situation depicted in the movie. No bank has the money to cover all depositors if they all clamored to withdraw it at the same time. The FDIC was created just to assuage the general public from flocking to banks in the wake of the bank failures during the Great Depression. It was meant to be a stopgap insurance fund to cover banks that had to shut down. If many banks started to fail at the same time, no government agency would be able to cover all of the money. Putting money in banks is much less risky than in the stock market, but it is not 100% failure proof. I thought it was odd that I started to see these FDIC sponsored ads in the local newspaper stating how no depositor has lost a cent since the agency was created. I kept thinking, "I already know this. Why are you spending all of this advertising money in the paper to repeat something that we already know?".
  |     |   Comment #6
QUOTE: "Why are you spending all of this advertising money in the paper to repeat something that we already know?".

Well, look at the old lady who had put $10,000 in a box of crackers and then inadvertantly returned the box to the store. Sure, she's an idiiot and may have been a remnant of the Great Depression, but still, if she's thinking that way, there are plenty of newer younger people who are subject to having similar thought processes.
  |     |   Comment #7
QUOTE: "Well, look at the old lady who had put $10,000 in a box of crackers and then inadvertantly returned the box to the store."

I saw that report on the TV. The person who found the money had the decency to take it back to find its proper owner. The old lady didn't even bother to offer a finder's reward or even say "thank you".

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