The IndyMac bank failure was certainly a sign of the times. It was sobering to see bank customers lined up outside the bank just trying to get their money. Of course, this leads to speculation that hundreds of banks could potentially fail.
Of course, thus far, it is tough to tell which banks are in trouble. Most companies tell you that they have plenty of money and that there are no concerns up until the day that they close their doors. Companies always put a brave face on in the midst of potential collapse. If you think back to Bear Sterns, just four days before their collapse, the CEO stated that everything was just fine.
Regardless of whether hundreds of banks fail or not, there are general principles that you should follow. The number one principle in this situation is to have your money diversified. This principle also applies to bank accounts.
You should always have your money in the forms of bank and savings accounts and CD’s only in FDIC insured banks. In addition, you should always stay within the limits of the FDIC regarding FDIC insurance.
The Federal Deposit Insurance Corporation (the FDIC) was created by Congress in 1933 to protect consumers against bank failure. The FDIC protects depositors against the loss of their insured deposits if an FDIC-insured bank or savings association fails.
The FDIC insures up to $100,000 per person per bank. So if you have $105,000 in a CD, it will insure that you will receive $100,000 of that back in the event of a bank failure.
If you have a joint account, that joint account is insured up to $200,000. Remember the rule of thumb is $100,000 per person per bank. If you have an IRA, that $100,000 increases to $250,000 due to legislation passed by Congress.
The FDIC doesn’t insure investment accounts or money market accounts. This only applies to savings, bank, and CD accounts. It also applies to various other cash type instruments.
So it makes no sense to go beyond those limits whether or not we are facing a banking crisis. Go only with FDIC insured banks and stay under those limits and you should be just fine.
Incidentally, the FDIC fund has a value of $53,000,000. The IndyMac bail-out is estimated to cost $4 to $8 billion.
What about brokerage houses where you have your investments? The Securities Investor Protection Corporation, commonly known as SIPC, provides customers with limited protection. The SIPC, a non-profit, non-government membership group, is the insurance body for the brokerage industry.
It protects up to $500,000 per customer and of that amount, $100,000 protection of cash. It only protects customers in the event the broker firm fails and or the broker steals the customer’s money. It doesn’t protect against investment value loss.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
