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Watch What You Hear: How To Avoid A Bank Run
When NY State Sen. Chuck Schumer questioned IndyMac, the nation’s 2nd biggest mortgage company, people didn’t just listen - they panicked. The senator’s loose words regarding IndyMac’s lending practices might be part of the reason why the FDIC is bailing the company out of $900 million in debt, but he’s not entirely to blame.
The $1.3 billion dollar run on IndyMac was a self-fulfilling prophecy. The company went under 11 days after Schumer’s criticism of IndyMac. One of the reasons? Depositors were quick to act out of fear before digging up the facts. Before the Senator’s ill-fated June 26th letter, those depositors were probably sleeping easy, thinking their money was just fine.
The FDIC insures checking, savings, and CD accounts up to $100,000, but after that, you’re on your own. Got more than $100,000 to deposit? Brett Arends’ article in The Wall Street Journal explains that there are a few ways to keep your money safe, even if other depositors make a run on your bank.
The first tip is a no-brainer. Since the FDIC only insures one account up to 100k, you can deposit up to that amount, then go to another bank and deposit another 100k there. As long as the money is in separate accounts, each at 100k or below, you can relax. But as Andrea Coombes points out in this article, if you buy a CD from a broker, or sign up with an internet bank, be sure that the underlying products aren’t connected with your traditional bank. Otherwise, you might go over FDIC insurance limits without realizing it.
Say you have millions of dollars but you don’t want it scattered around every bank in town. The Certificate of Deposit Account Registry Service (CDARS) lets you deposit more than 100k (and up to $50 million) with any institution you prefer, plus you get one interest rate and one regular statement. The best part is, with this program, the FDIC insures the full amount.
Bank runs can be avoided if money is deposited the right way. Speculation can be an ugly thing. Companies like IndyMac (now IndyMac Federal Reserve) are proof that when people don’t have all the right information, they’re quick to cash out in an attempt to save their own skin.
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Blaming Schumer for the run on Indymac is ridiculous. To elaborate on the famous “yelling fire in a crowded theater” analogy, imagine if someone saw a person lighting and throwing matches on the floor in a crowded theatre. This person reports it to the manager, who then runs out and screams “Fire!” Do you blame the first person?
Should Schumer have kept his mouth shut and let Indymac continue its financially dangerous actions? Where were the regulators? Oh, that’s right…they were, as has so often happened in this administration, far too busy helping the bankers to worry about the depositors.
C. Sykes -
You certainly make a great point about blaming Schumer, although that is a bit far from the point of this particular blog post. Sure, Schumer took a bath when the press lit him up over IndyMac’s bank run, but the point I was making had more to do with the bank-running depositors, not Chuck.
Maybe Schumer’s letter was the straw that broke the camel’s back, but the fact that so many depositors had money, uninsured, sitting in IndyMac highlights a much more concerning question: why?
Doesn’t the FDIC stamp their 100k insurance policy all over the place when someone opens any kind of bank account? They sure do. So why would anyone want to jeopardize even a penny of their savings, when it’s so easy to get the full amount covered?
My aim is to prevent future depositors from making the fatal flaw of putting more than 100k in one bank (uninsured, of course).
Sure, regulation over IndyMac could’ve been handled much better, but Schumer’s words seemed to be enough to ignite uncertainty in depositors.
It only takes one domino to make the rest fall.
-Colin C.
Colin, it would be good if you dont spread misinformation. Misinformation is what causes bank runs. You can have well over $100k in one bank and have it all insured. of course, you would know that if you read the Fatwallet thread on this exact same subject by a certain anonymous Finance forum poster, which has an eerily similar title, photo and message.
http://www.fatwallet.com/forums/finance/844118
Hi SUCKISSTAPLES,
I’m having a trouble seeing how I have “spread misinformation” though you’re right, I didn’t mention a few of the exceptions to the $100,000 max. per account rule. Also, thank you for pointing me (and our readers) to your thread. If you feel I’ve left anything else out of my post or believe that you can add to it, then by all means, please do!
Although I’ve never been on Fatwallet, I’m told that it is a very resourceful site with many mindful people discussing relevant financial topics, like the IndyMac Bank run. It IS strange that my post is “eerily similar” to a thread on Fatwallet, but I assure you that I crafted this post with integrity.
-Colin Constantine
In the Philippines the PDIC insures up to 250 Thousand Pesos only. But it’s possible to split higher amounts into different account holders and/or different banks. Now I found this high interest cd Can anyone advice me on this seemingly lucrative offer.