Facts About Problem Banks: Should You Be Worried About Your Money?

by Silicon Valley Blogger on 2008-09-1622

Do you think your bank is in trouble? Worried about your savings accounts in problem banks? Some musings on the banking and financial crisis and the plight of troubled banks.

I took a few days to absorb the latest news in the financial industry; if you read the mainstream media these days, it’s as if financial armageddon is upon us. Do you remember any of these jaw-dropping stories from your local paper?

Drama In Wall Street

  • Lehman Brothers files for bankruptcy. A potential buyer (Barclay’s) balked as a buyer.
  • Merrill Lynch is taken over by Bank of America.
  • AIG, a large insurance company, got a forced restructuring.
  • Several global banks are setting up a $70 billion loan program for troubled institutions.
  • The Federal Reserve is taking steps to better its lending programs.

When we read something along these lines, we often wonder what’s next for savings account rates and our high yield savings accounts. During times of financial upheaval, the government tries to do its best to calm the crazy markets and to ensure liquidity in our financial systems.

But, with these financial institutions falling like dominoes, you may wonder — how nervous should you be? Well, there’s SIPC protection for investment accounts and FDIC protection for bank accounts. At this time, it’s important that we understand the details of what SIPC and FDIC coverage will do for us, as there are some limitations to their reach and there are specific applications for them.

Because of such coverage, I’m not particularly concerned by losses due to a bank or brokerage failure, but I do wonder: in what state can I expect to find my money if my bank fails, and how big an inconvenience is it going to be to have to deal with my accounts in limbo? How much should I worry?

bank in trouble, problem banks

Problem Banks and The Accounts You Have With Them

Several other bloggers have tackled this issue in the past, particularly when discussing the demise of IndyMac Bank, a thrift that went under a few months ago as the second biggest failed bank in the U.S. I’d like to chime in with my thoughts on this topic in light of economic events and shocks in the stock market:

#1 You’re okay if your money stays within SIPC and FDIC limits.

If your bank or brokerage folds, you’ll get your money returned to you if you are within insurance guidelines. For FDIC, it’s $100,000 per depositor in individual accounts, $250,000 in retirement accounts; for SIPC, it’s $500,000 per account (regardless of type or registration). Interestingly, if you’ve got accounts properly structured at your bank, you and your spouse may have as much as $1.1 million in deposits insured at your bank. If you’ve got money outside of that coverage, you become a creditor of the bank, and you’ll fall in line to get your money back equivalent to 40 cents to 100 cents on the dollar (averaging 72 cents on the dollar) depending on how the FDIC conducts the sales of assets of your bank.

#2 Struggling financial institutions continue to function in some capacity even after they fail.

Such companies are ultimately taken over by the FDIC (they declare bankruptcy) or by another company that absorbs them. The larger they are, the less likely it will be that they’ll just up and disappear leaving you with losses. In past cases, a bank in trouble will be bought out by another, will merge with some other entity and keep doing business as usual. Bankrate states that most of the time, the average bank customer is unaware that changes are going on behind the scenes. The FDIC facilitates the “transfer of ownership” and assets of one bank to an acquiring bank.

#3 Acquired banks have it easier than those that file for bankruptcy.

Normally, you’ll be able to use your cards, checks and other tools if the bank is simply in a buyout transition. But you may be more inconvenienced if your bank goes bankrupt: in this case, you can probably expect your assets under FDIC protection to be mailed to you expeditiously and you may have to review your accounts for pending transactions you’ll need to address and resolve in some other manner (e.g. your direct deposits and payouts to merchants) outside of your bank’s systems. Reconciling all that just means extra work for us when we’re busy enough as it is. Not fun.

Case Study: Washington Mutual

This all brings to the forefront the plight of a popular bank among bloggers — one which we’ve brought to your attention in the past, due to the great interest rates it has been offering. Because of what’s been happening, I’ve been keeping a close eye on Washington Mutual, which has been widely cited as one of those vulnerable banks on the brink. The latest on this bank is that its S & P financial rating has been cut to junk status and that some suitors are knocking at its door.

I’ve written about WaMu in the past, discussing its attractive rates. However, it seems that in order to try to stem their problems, they had hiked their free checking and savings account APY to 4.00%(!) in order to gain customers. Of course, this was done in the past as a last ditch effort to “look good”, even as they were trying to right a “sinking ship”. There are folks out there who will take that rate and are willing to live with the risk of their bank undergoing changes. But I’d be wary about developments like this, while the worst of any financial crisis continues to wind its way throughout the financial industry.

My take? If you’ve got money in WaMu that you don’t need quick access to and is FDIC protected, I’d keep my funds in place and see how things play out; otherwise, I’d be moving some funds around right about now (to keep under the FDIC guidelines at the very least). If you’re looking for potential alternatives, you may want to check out HSBC Advance or FNBO Direct.

Copyright © 2008 The Digerati Life. All Rights Reserved.

{ 17 comments… read them below or add one }

Connie Brooks September 16, 2008 at 10:03 am

I’m not really worried about this. I don’t think we’ve seen the end of the solvency problems, but as you said, our funds are insured.

Andy September 16, 2008 at 10:06 am

Yes WaMu is one to be very worried about. Their CDS are returning 30%! In terms of online savings I say stick with the global leaders – ING and HSBC.

WealthBoy September 16, 2008 at 10:36 am

I couldn’t have said it any better myself. It always saddens me when I read a story about people making bank runs when they get spooked by news stories about banks going under. It’s somewhat unsettling how little people understand about the banking system.

Fred, RTP, NC September 16, 2008 at 10:42 am

Silly folks- you have no idea what you are talking about. When Wamu fails, it will wipe out the FDIC, meaning it will have to go Congress to get a HUGE line of credit to insure deposits. While they may get it, there are many other banks that will tap it when they fail(ever hear of cross cascading failures)? ‘Insured’ means you’ll get it, but they dont say ‘when’. Large scale bank failures will massively delay account restitution. Think you can wait 10 years for your money, as happened in many cases during the bank failures of the early 90’s? 1000 banks are forecast to fail, including 1 or 2 large banks that would wipeout the CREDIT LINE FROM THE CONGRESS.

Believe what you want but you’d better have cash when the FDIC cant provide liquidity in a reasonable timeframe.

Silicon Valley Blogger September 16, 2008 at 10:57 am


Bank failures did happen in the 1990’s and I haven’t met anyone who lost access to their money from a bank failure then. I’d love to hear from someone who actually lost accessibility to their cash during the S & L crisis (or at other times) as I haven’t met a single person who’s had issues like the ones you’ve described yet.

So what do you propose people do? Get their money and hide it under their floorboards (ok, a home safe) until it’s “safe” to come out? I am not being facetious here… I’m really curious to know what other options we have.

If your bank isn’t safe at all, in the way you describe it, then nothing is. Maybe except that bunker under the ground in the middle of the desert….?

I’m still in the camp that believes that in a couple of years (or more), we’ll all just be sitting around jovially reminiscing about how horrible it was in 2008, but “look at us now, the good times are here once again”!

Bill September 16, 2008 at 11:06 am

Talk of runs on the bank are irresponsible, akin to shouting “Fire!” in a theater. Absolutely wrong.

Whether WaMu fails or not is separate from whether you get your money. The federal government (US Treasury and the Fed) will ensure that any money deposited at your WaMu branch will be made available to you. Count on it.

Fred is too over-the-top on this one. He may have grown up during the bank runs of the 30s. That is not going to happen.

plonkee September 16, 2008 at 11:14 am

Is the FDIC actual insurance? I mean, who pays at the end of the day, do the banks pay via premiums or something?

Aryn September 16, 2008 at 11:25 am

I currently have a whopping $13 in my WaMu account, but even if I had more, I wouldn’t be worried. The IndyMax transition to new ownership was smooth, it was the run on the bank that wasn’t.

Silicon Valley Blogger September 16, 2008 at 12:08 pm


To answer your question “do banks pay via premiums?”
The short answer: Yes. Some discussion here. So the premiums for FDIC hike up after episodes like we’re experiencing right now, I gather.

jim of Blueprint for Financial Prosperity September 17, 2008 at 7:22 am

Also, the government won’t let the FDIC run out of money and not cover deposits under $100k, because that would cause a huge run on banks and a collapse of our entire system… that’s the latest concern people are having about FDIC…

Sentient Money September 17, 2008 at 8:20 am


As a former bank auditor your take is a little off base. One, the FDIC has NEVER failed to payout. I would love to find real evidence that it took 10 years to payout money from the S&L scandal. I doubt very much that it exists. Two, most of the time the FDIC doesn’t payout directly, they arrange for another bank to take over the deposits and make up the difference.

Yes, the FDIC might have to get more money if it gets really bad. The thing to remember is that if it gets, so bad congress can’t fund the FDIC it won’t matter if your money is stuffed in a 5 foot thick walled steel safe under your house…it will be worthless.

CMOE September 17, 2008 at 9:30 am

That can cause some real fear and real problems in the future. This is a video that I found some pretty helpful advice in (It’s called “is your money safe”).


Tim September 17, 2008 at 11:20 am

why are you wary about wamu? if they are offering high interest rates and are giving you monthly or quarterly interest, you are making money while having the fdic backstop for principle+interest earnings to date of if they go under. You may have a week or two period where you would have to wait to get it back from FDIC, but presumably you were willing to wait 6 months to a year to get into the CD in the first place. So really, there is no downside to putting money in.

you can also look at it this way, if wamu is next to go, it is much better to get the money while you can and be more than 95% guaranteed that FDIC can cover a wamu collapse, rather than having it in a bank that isn’t currently on the radar and having FDIC stretched if someone big like citi goes under. i guarantee if someone like citi goes under, FDIC insurance will look like every other “safe” investment like money market fund worth only 97c to the dollar, enron, lehman, merrill, bear, fannie/freddie, etc. etc.

that’s also another cautionary tail. diversify accross FDIC insured providers too. it seems de guerre for everyone to say they are fine, when in reality they aren’t (anyone remember bear’s statements a week prior to it tanking?). or even consider everyone always heralding Vanguard funds, and now some vanguard bond funds are being hit hard due to their exposure. bond funds, those “secure” investment vehicles that are supposed to be “secure” in this type of environment.

I’m a little concerned how people are relying so heavily on FDIC insurance in their arguments. Although the FDIC has never failed to pay out thus far, we have never been in this type of liquidity crisis.

if we all learn one thing from this mess, it is diversification and not to rely on one safety net. remember the adage of previous performance is no indicator of future performance.

i for one have confidence in wamu. if it stays resilient at $2 and above a share, i think it can weather by itself, although i’d like to see a suitor. S&P also stated wamu’s is sufficiently capitalized although they downgraded bond to junk.

i think at this point, everyone is trying to do what they can to stabilize fears and tame speculation by getting banks to find good matches for weaker companies like wamu, not b/c the weaker companies couldn’t weather the storm, but in order to give the system some security by not fueling a self fulfilling prophecy. there is so much panicking in the system right now, that we can get into a situation where panick takes over actual realities.

everyone has been saying wamu would be next, and they’ve been saying that it is very week for several months, but the bank won’t die. however, the govt is very concerned that people will over panick on wamu and force it into the ground. wamu has around $180 billion in deposits as 6th largest bank. the FDIC doesn’t have anywhere near that amount.

so, is everyone so confident that the FDIC is going to back stop, if it doesn’t have enough to backstop the 6th largest bank?

Betty September 18, 2008 at 12:16 am

WaMu is offering the 5.00 percent APY CD again on the website. The rate is available for two terms, 12 and 13 months. In Northern California, the rate is supposed to be available at the branches, although I have not confirmed this. The rate offer is supposed to last yesterday, September 16.

Silicon Valley Blogger September 18, 2008 at 12:27 am


Thanks for your thoughts!

I have high hopes the WaMu will survive and come out of this turbulent period whole. I’m not overly concerned about WaMu per se, just saying that we should be prudent about our savings at this point and take a look at what is or isn’t FDIC protected.

You may want to diversify any funds that you have in a bank that is under some scrutiny right now, that is over and above the FDIC limits — to reduce the risk of any possible loss to your short-term funds.

Michael September 18, 2008 at 8:29 am

There have been rumors for years that if the crisis were truly big enough that the FDIC would not be able to bail everyone out. I have no idea if this is true or not and I really don’t want to find out.

Now people can argue the government will never let the FDIC become insolvent, but exactly how are they going to do that? Remember government only has three ways to raise cash…

1. Taxes
2. Borrow it
3. Print it

In a true global crises where people are truly hurting I think the first two options are out. That brings us to option 3, which as any historian knows has been used many times by governments all over the world through history during serious crisis with the same bad results…inflation.

I am not saying the we are on the verge of total collapse, but I am saying perhaps we should all be a little more sober of exactly what government can do to help and what steps we as individuals should be taking to protect ourselves and our interests if this gets a lot worse. I wish I had an easy answer of what those steps should be, but I don’t.

Mr. Money October 6, 2008 at 3:39 am

Much, much more worried about hyper-inflation than my savings accounts. I’m under $100,000 in each individual account so FDIC will take care of any bank failures.

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