What To Do If Your Big Bank Gets A Buyout Proposal

by Silicon Valley Blogger on 2011-10-1921

As bank customers, most of us would like to know what to do if our bank gets acquired or fails. What can we expect if our bank gets bought out?

Some years ago, Washington Mutual was known for online banking products such as a savings account that offered a high yield for linking with a checking account. Unfortunately, WaMu was the most prominent bank affected by the financial crisis. Let’s go over what can happen when a bank “fails” — and how it can affect your money.


Bank failures aren’t necessarily uncommon, but from 2008 and onwards, things got dicier for the banking industry. Scores of banks have failed in recent years. These failures have occurred to banks of different sizes that are located in a variety of states. Typically, you’ll find that a state or federal banking agency will move in on a failing bank when that bank owes more than it can pay back to its depositors.

When Washington Mutual suffered from the subprime mortgage crisis, it lost a great deal of its value. A bank run resulted when a number of depositors withdrew billions of dollars in a span of 10 days. This bank run drove the Office of Thrift Supervision to seize WaMu, which made this the largest bank failure to happen in the U.S. to date.

WaMu’s Buyout by JP Morgan Chase

The FDIC then stepped in to auction off WaMu to JPMorgan Chase. That meant that WaMu’s customers were absorbed by Chase’s banking division. Rather than completely suspend services for WaMu account holders, the FDIC indicated that deposits would continue to be accepted and that checks would be processed as usual. ATMs and online banking remained available.

Eventually, these customers were able to use Chase’s ATMs for their deposits and to transact business in Chase’s branches. After some months (by the end of 2009), WaMu branches across the nation were either closed or became Chase branches. Now, the former WaMu accounts have been fully transitioned to Chase accounts.

Your Bank Failed? FDIC Coverage Protects You

Fees aside, there’s still good news for existing customers of an acquired bank. You might be wondering what to do if your bank faces the possibility of failure. Thanks to FDIC coverage, you don’t have to worry about losing every penny you have. This is because the FDIC’s insurance covers each depositor for up to $250,000 per ownership category. Your savings and checking accounts are protected up to this amount. So are NOW, money market deposit accounts, and even certificates of deposit. If you have more than the maximum in one account, you should find another bank for the amount that isn’t covered.

If your bank fails, the FDIC will let you know by mail. When another bank buys your bank, you’ll get another letter informing you. According to the FDIC’s list of bank failures, the majority of failed banks are taken over by other banks.

Should You Switch Banks?

Should you immediately move to another bank or credit union if your bank is acquired by another institution? Following are some strategies you can follow if you are pondering this question:

1. Learn about the acquiring bank. This might be a good idea. That’s because the new bank might actually offer favorable items like free checking or decent interest rates for its incoming customers. WaMu’s customers gained access to Chase’s line of credit cards, for example.

2. Compare the acquiring bank against the alternatives. Take some time to visit the acquiring bank’s branches and listen to what the word of mouth about the bank might be. Compare this bank’s reputation to that of any competitors you’re eyeing. It isn’t worth the hassle to make a long drive to a bank that’s farther away or to one that doesn’t have the benefits you’d prefer.

3. Wait things out and keep the status quo. Don’t act rashly. Your old ATM cards may remain in service during the transition, and you’re likely to be able to access your account online. Your old checks will probably still be processed as usual, until the new bank discloses new terms. Also, it’s best for you to continue to make your loan payments as usual until you’re directed to a new payment address or location. Wait out the transition period before you decide to leave. Bank acquisitions are complex negotiations that take time, so it may be six months or longer before you notice anything different with your rates or fees.

4. Be prepared for possible changes to existing accounts. It’s possible for your bank to have its products transition to other types with added fees. This is when you should decide whether it makes sense to make changes. For instance, WaMu’s former customers learned that their free checking accounts were transitioning to a fee-based type of account. We’ve written about how the popular WaMu Free Checking account turned into the Chase Total Checking account. The bank sure couldn’t wait to start charging their customers some bank fees. So be aware that your new bank may adjust your account’s terms and may modify the services you’re offered.

5. Don’t forget to monitor your deposits through a transition period. Unclaimed deposits are sent to the FDIC for processing. After that, the FDIC turns over the unclaimed deposits to the state you list as your address on your account.

No Bank Is Immune

As we’ve learned from the last few tumultuous years, a bank failure can strike large banks like WaMu or even the friendly, smaller local banks that have been around for decades. However, since other banks tend to take over the failures, you’re more likely to transition to a new bank than to utterly lose your money. Such was the case when WaMu’s customers were picked up by Chase. Make sure you’re aware of your bank’s FDIC coverage and general state of health and you’ll go a long way to protect your assets.

If you’re unhappy with your bank, here’s our recommended list of online banks which you can check out. We like online banks because of their lower fees.

Created July 11, 2008. Updated October 19, 2011. Copyright © 2011 The Digerati Life. All Rights Reserved.

{ 20 comments… read them below or add one }

RacerX July 11, 2008 at 8:58 am

WaMu was worth a look at one point, given that my Etrade wasn’t doing as well as other accounts. I wonder if their interest rates were limited, like for the first 6 months.

WaMu was beaten up pretty badly over lending practices too, so maybe they were just trying the old-fashioned principle of buying some clients, and then trying to load them later.

john July 11, 2008 at 9:05 am

You should check out bankrate.com for a list of all the top savings/checking accounts out there.

Tim July 11, 2008 at 9:23 am

Good for me because I own wamu stock. Thanks in advance! lol

Silicon Valley Blogger July 11, 2008 at 9:45 am

@RacerX,

Yes, I did check on what’s going on with them. Their site does not say anything about a limited time offer and the rate applies to all their saving tiers, whether it’s $0 to $9,999 or $10,000 and above checking/savings balance. However, they do state in fine print that their rates are subject to change, which is the standard company line.

I told my husband about this as it seemed interesting and he, a big fan of macroeconomics and scary financial news ;), pointed out the current events behind WaMu as far as stock and loan issues of late.

But there were these points to think of: accounts are FDIC insured plus I’ve seen some negativity also cloud my previous employer despite the fact that it is one of the biggest banks out there. So the loan problems have a huge outreach and affect most financial institutions. Seems like something you can’t escape these days no matter where your money is parked.

@John,

Yes, I’ve checked bankrate. Some of the info doesn’t seem like they’re referring to the same financial products, but I could be wrong…? I’ll check out the info more carefully.

@Tim,

Good luck with your investment! :) You’re not alone — the financial industry as a whole is in the doldrums.

Andrew July 11, 2008 at 10:23 am

I had signed up for WAMU’s Online Savings account and was pretty satisfied. Been banking with them for about 6 years (checking), but had my savings over at Emigrant Direct. When Emigrant’s rates dropped like a rock I looked at the new WAMU account. Signed up online and was happy to do instant transfers between checking and savings instead of having to wait for the transfer to clear.

jdauie July 11, 2008 at 11:30 am

I used WAMU for about a year until I got married, at which point I found out that for a few operations they required you to visit a branch location (such as opening joint accounts). This didn’t work for us because of distance to the nearest branch, so I stopped using them. I liked their products, but before going with any bank, I recommend that you check if there are any reasons that you might be required to visit a branch.

Silicon Valley Blogger July 11, 2008 at 11:37 am

Thank you for this feedback! Yes, access to a nearby branch becomes a must when you’re required to do some banking tasks in person.

Convenience can be an issue for many, particularly when you’re dealing with banking. It’s not as big a deal with online investing where you won’t need to worry about brick and mortar locations given the long-term nature of your investment transactions.

MoneyNing July 11, 2008 at 11:48 am

Tim: Good luck with that stock!!!!!

jdauie: Maybe you can try HSBC. They offer an even better rate and I’ve never been in their branches before. They aren’t really known in the US but they are huge internationally (bigger than WaMu I’d say).

dawnf July 11, 2008 at 12:09 pm

Hi, I liked Wamu as well. We had their free checking for quite a while & I’d also like to mention they allowed one free reversal of their overdrawn fees per year and they had wamu for kids where they give $ to the school of your choice based on your purchases. Sort of like escrip. We were happy with them & liked the ease of transferring between wamu & my usaa savings. Never had problems in 6 years as a customer.

I missed Wamu when we lived in mass.
Aloha

Kevin July 11, 2008 at 4:07 pm

I switched to WaMu when they started that promotion at a 4.0% APR. I was very happy with their service and support. The couple of times I visited a branch, I found the people to be exceptionally friendly and helpful.

In general, I keep the majority of my money in the savings account and transfer over whatever I need to pay bills. If you do this, make sure you go into a branch (or call customer service) to request them to link your accounts with overdraft protection. If you open your accounts online, they’re not linked for overdraft protection and if you screw up the timing of a transfer you’ll get hit with overdraft charges.

Editor: So how is it now that it’s JP Morgan Chase?

Frugalchick July 11, 2008 at 4:59 pm

Yep, we had signed up for WaMu specifically for their high interest savings account. It helped too that they were only walking distance from our house.

This bank also allowed me to do FREE international wire transfers from the checking account that was linked to our savings. We usually send money overseas and it costs us anywhere from $10-$14 dollars per transaction. Just another reason I liked WaMu.

J.D. Fournier July 11, 2008 at 9:16 pm

I wouldn’t worry about a bank’s stability. The reason you are getting a good rate is due to the risks you are taking with an account. As long as your account is kept to $250,000 or less, you are fully covered by FDIC. In that case, access to your money will not be delayed for more than 24 hours. They have a very good track record with taking over banks.

The Happy Rock July 14, 2008 at 12:41 pm

I have been with ING checking and savings for a year or so now, and I love it. A few things I really love are :

the free e-checks and free online paper checks. I buy a book or two of stamps a year now. The transition to no paper check book was little challenging, but well worth it.

Interest on my checking balance.

Instant transfers. I suspect Wamu has this.

Unlimited number of savings accounts. I think I have 12 right now. I love having separate savings bins.

Almost free overdraft coverage.

Great website and customer support.

Two dislikes. Quicken integration isn’t good and the rates aren’t cream of the crop anymore.

Sam G September 20, 2008 at 8:14 pm

I was never sure of the WaMu checking account. I had checked out the fee sheet and it was loaded. Well, at least for those that have issues with money management. They did offer a free overdraft in case you ever made a mistake but after that, it was about 35 dollars.

I’d rather go with one of the newer high yield checking accounts. There are a lot of better offers out there.

Steve A November 24, 2008 at 3:58 pm

Hmmmm…take a look at your online savings rate now.

Editor: Yes, interest rates are down significantly.

Curious Cat Investing Blog July 11, 2009 at 3:18 pm

When it was around, it was worth considering. There’s FDIC insurance. The bank was quite unstable, and finally fell. The stock price, for example, was doing well for a while (over 40). It crashed to single digits. But as long as your entire deposit is covered by FDIC, you are in safe (though if a bank goes completely under – not that likely – there can be a delay in getting your money). Normally, a bank’s assets are bought out by another bank.

Silicon Valley Blogger March 17, 2011 at 11:01 am

This article has been updated to reflect changes in the online banking sector. Please read the disclaimers carefully. Thanks!

Silicon Valley Blogger October 19, 2011 at 8:34 pm

The New York Times just published a piece today, stating that Bank of America (with $2.22 trillion in assets) is no longer the largest bank in the United States. That honor now goes to JP Morgan Chase (with $2.29 trillion in assets). Size can be a detriment to profitability, as evidenced by BofA’s recent (two) Fed bailouts.

PKamp3 October 21, 2011 at 5:51 am

Interesting to look back now that Chase is the largest bank. I had a WaMu Free Business Checking account – great account they had there. Chase turned it into a $15 a month account (I don’t remember getting the notice, heh), so now I’m gone. Still, they’re the biggest now, so they must have done something right.

Silicon Valley Blogger October 21, 2011 at 8:52 am

@PKamp3,
When anything gets that big, it bugs me. When something is that big and controls so much (I would go so far as saying they control the lifeblood of the economy), I get nervous about the power they wield. If you ask me, there needs to be stronger regulations that very large institutions/companies/organizations adhere to, to keep them (for lack of a better word) “honest”. This track record of merging and acquiring is troubling to me: Chase Manhattan and JP Morgan merged in 2000. Then we had a failing WaMu — huge in its own right — getting absorbed into the JP Morgan Chase umbrella. What next — BofA and JP Morgan getting hitched? ;-) Kind of a scary thought. The “4 big banks” are known to be: BofA, JP Morgan Chase, Wells Fargo and Citibank. Keep an eye on these guys, esp. when any kind of crisis hits and talks of bailouts become fashionable again. If you’re curious to see how TARP money has been handled, you can check here. It’s rather strange to see taxpayers and the government acting as the lenders to these big corporate entities.

On your other point, free checking still exists though, so people should check their options when their big bank does the switcheroo and slaps $15 a month onto an account.

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