Money doesn't actually talk. We do.

NetBank’s Sudden Death

First things first: Happy Rocktober, everybody.

So last Friday, the Office of Thrift Supervision (aka The Government) closed online bank NetBank. Citing “significant losses in 2006 primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies” the federal agency appointed the Federal Deposit Insurance Corporation as receiver. The FDIC is like an insurance company that makes sure a bank’s customers don’t lose all their money when a bank goes belly up.

Meanwhile another internet bank, ING Direct, took over all of NetBank’s deposits that the FDIC covered. EverBank, another online-only bank (and erstwhile potential savior) assumed the bank’s mortgage assets.

With more than 100,000 customers and $2 billion on deposit, NetBank’s closing is the largest bank failure in 14 years. And NetBank was one of the early players in online banking, having set up shop in 1996 (!). Some online-bank haters may feel this is the proof they were waiting for. “See, suckers,” they cry, “we told you those online banks were bunk! Good thing I’ve got my money in the local savings & loan.”

The problem with this sentiment is that it’s wrong. NetBank didn’t go belly up because it was an online bank–it went belly up because it made crappy loans to people who shouldn’t have been borrowing that much money. The inability of some of those people to make payment on their mortgage, plus the heated competition online from larger competitors (HSBC, ING, Charles Schwab, you name it) made it impossible for them to continue doing business.

But again, that’s a poor-management/bad-decisions thing. It’s not an online-bank thing. Just to be sure, I called the Office of Thrift Supervision (the folks who shut NetBank down) to get their take on the situation.

“We don’t think it’s an internet banking issue at all,” says Bill Ruberry, spokesman for OTS. “We monitor other online banks and haven’t seen these sorts of problems. NetBank’s problems were related to lax underwriting, a change in business strategy, a change in management–there were several factors that contributed to their closure.”

It made me wonder if my recent decision to move my checking account to Charles Schwab was a good one. (In related news, Schwab dropped the interest rate on its checking accounts from 4.25% to 4%, as a response to the recent rate cut initiated by the Fed. Expect to see similar rate cuts at high-yield accounts across the nation, if it hasn’t happened already.) I felt that it was still the right choice but was curious to see what they were saying about the recent news.

“It’s not about the channel–or how you reach your bank–it’s about the strength of the institution,” said Greg Gable, a spokesman for Schwab.

That’s all well and good, Greg, but what about mortgages? Schwab sells them, so how much of this Great Credit Crisis is affecting you guys?

“The vast majority of our mortgage business has been with existing clients of our brokerage,” Gable said. “That’s meant that we’ve been dealing with higher net-worth individuals and a higher-quality business. There’s been little to no effect on us since the recent mortgage troubles unfolded.”

Very well then; color me convinced. My transition to Schwab’s Investor Checking continues unabated.

Oh–one more thing about this recent NetBank mess: For most NetBank account holders, this recent unpleasantness won’t be much of a big deal–their accounts will migrate over to ING and life will go on with little (if any) interruption.

But it turns out that there were about 1,600 people who were keeping more than $100,000, the maximum that the FDIC will insure, at NetBank. Now that’s just crazytalk. First of all, what the hell are you doing with $100,000 in checking or savings? Second of all, the FDIC only insures up to $100,000 per depositor per bank. It’s cool if you have a checking account, a savings account and a CD at one institution, but the total has to be less than $100,000 for it to get full coverage. Otherwise, you may lose some of your cash if the bank up and dies.

If you’ve got that much money to throw around, surely there’s more than one place you can put it.

–Sam Grobart