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How the Banking Crisis Affects Consumers

Nancy Trejos
Washington Post Staff Writer
Wednesday, July 16, 2008 12:00 PM

Washington Post Staff Writer Nancy Trejos was online Wednesday, July 16 at Noon ET with Eric Solis, a certified financial planner and president of Save252.com, to answer questions about the safety of bank deposits, what the FDIC insures and what you can do if your bank fails.

A transcript follows.

Read today's article on consumer banking What to Know About Your Accounts.

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Nancy Trejos: Hi all. Thanks for joining us today. We are happy to answer whatever questions you've got.

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Laurel: Does the FDIC insure the interest your savings account as accrued, or only what you've actually deposited?

Eric Solis: FDIC deposit insurance covers the balance of each depositor's account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank's closing.

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Reston, Va.: I have purchased some mutual funds through the securities division of a large local bank which is having trouble. Will I lose these investments if that bank fails?

Eric Solis:

No. Your account at the securities firm is segregated from the banks assets and they are insured by the Securities Insurance Protection Corporation (SIPC) up to $500,000. Your broker dealer likely has a custody relationship with a large bank or clearing broker dealer. If the BD fails then your FDIC insurance will kick in. If you have over $500,000 in your account you may want to review the BD's additional insurance coverage and be diligent in researching the quality of the underlying insurance company.

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Washington, D.C.: I was surprised to see two people ahead of me at the bank this morning (and one at the ATM). Fearing a run, I withdrew all of my savings. I will now keep my money under my mattress where I know it is safe thank you very much.

Eric Solis: Keeping money in cash is not wise or recommended. If your money is with an insured financial institution it is secure. You may want to avoid FI's that have grown aggressively through broker deposits. These are the banks that are having the most difficulty keeping assets.

Nancy Trejos: All the experts I talked to yesterday said the same thing: The most important thing is not to panic. Yes, these are troubling times, but most banks are in good condition. The FDIC keeps a list of 90 problem banks. While that's not a good thing, in the grand scheme of things that's a small percentage of the nation's financial institutions. And, as the FDIC spokeswoman I talked to pointed out, most of these problem banks are not going to fail. Five have failed so far this year.

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Silver Spring, Md.: What about investment accounts? Suppose someone has 100K+ in investments (not IRA nor 401K) through a bank's securities service. Is the securities service seperate from the bank itself? Would the securities/investment service be impacted by a bank folding? What would happen to those accounts, given the individual owns the stocks and bonds, not the bank? Thank you.

Eric Solis: Security accounts are held separately. They are not under the bank umbrella. Broker dealers are covered under SIPC and are insured up to $100,000.

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Credit Unions vs Banks: Will credit unions go through the same problems as banks in the next few years? I do recall the problems of savings and loans institutions.

Thank you!!

Eric Solis: Shares of a credit union are insured by the National Credit Union Administration (NCUA). Established by Congress in 1970 to insure member share accounts at federally insured credit unions, This insurance is the equivalent to the deposit insurance protection offered by the Federal Deposit Insurance Corporation (FDIC).

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Germantown, Md.: How can one anticipate if a bank is going to fall into deep enough trouble that its assets are frozen and its depositors lose access to their accounts? I'm a bit nervous because all my accounts are in Wachovia, which seems to be headed for more trouble.

Nancy Trejos: Unfortunately, it's really difficult to predict if a bank is going to fail. Historically, bank failures have often come as surprises. Look at IndyMac. No one was anticipating that it would fold. As I mentioned earlier, the FDIC does have a list of problem banks, but there's no way of telling if even those are going to fail. Just remember, if you've got $100,000 of less in your deposit account or accounts at Wachovia, you won't lose any money, even if the bank closes its doors.

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East Lansing, Mich.: So I saw in one story that the Feds were calling in mortgages of a bankrupt bank.

This leads to the question of what happens if you both have a mortgage with the relevant bank, and have regular bank accounts. I.e. you both have money on deposit and have a loan. Could you find your money on deposit seized to pay your loan? (I suppose the same question arises if you have credit cards issued by the bank).

Eric Solis: No. But if you have over $100,000 they may settle by applying the overage exceeding coverage to your mortgage balance.

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Rockville Md.: Are CD's insured by FDIC?

Eric Solis: Yes. CD'a are insured by FDIC up to $100,000 (including accrued interest).

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Beaufort, S.C.: My bank Wachovia has said not to worry, but advised that CD's they hold for us are not covered by FDIC. The CD's mean we have over $100,000 in total accounts with the bank. Should we think about converting them to other accounts elsewhere?

Eric Solis: You should absolutely reduce the amount you have in any one bank to a maximum of $100,000 including accrued interest.

Nancy Trejos: Financial planners will always say diversification is key when it comes to your stock portfolio. The same is true for your bank accounts. If you have more than $100,000 in cash, why would you park it all in one savings insitution when you know that anything beyond that might not be insured by the FDIC? Spread your money around different banks to get the maximum amount of coverage.

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Hagerstown, Md.: Where can I view this FDIC list of 90 banks that are in trouble?

Nancy Trejos: Unfortunately, the FDIC does not publish the list of problem banks. I asked the spokeswoman and she would not identify them.

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Re: Up to $100,000: Okay, so the FDIC will insure everyone up to $100,000, but what if everyone who had a bank account, with from $1-$100,000 wanted their money today, could the banks cover?

Eric Solis: You have described the proverbial "run". The answer is no, they would not be able to cover all of the demands. They have a certain amount of money set aside as reserves to meet liquidity demands. But if everyone pulls out at the same time, they have a big problem.

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bank mortgages: I have my mortgage with IndyMac. What happens with mortgages? Will they be sold to another bank/FI?

Eric Solis: Your mortgage will continue to function as normal. The bank expects you to make your payments as usual.

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Virginia Beach, Va.: If a bank fails how long would it take for you to get your money through the FDIC?

Nancy Trejos: According to the FDIC, there's no cookie cutter way these failures unfold. But if you've got $100,000 or less, there really should not be much of a disruption to your ability to get access to that money, if at all. Generally, the FDIC will either get some other institution to operate that bank or the agency will do so itself. So you should be able to use the ATM or write checks. Look at IndyMac. The bank failed on Friday. People could still get their money out through the weekend. The only thing that wasn't working was online banking, and I believe that was fixed by Monday.

Now, if you've got some uninsured money in a failed bank, that's a much different story. You could end up waiting a very long time to recover anything above that $100,000 limit and you might not be able to recover it all. The FDIC will have to liquidate the bank's assets. If there's cash left over after they deal with expenses and leave some money in reserves (which they are required to do), they will start paying out dividends to creditors and depositors. As I said, that could take years.

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Brant Beach, N.J.: What's the best way to save money now? The economy seems to be collapsing, the banks don't seem to be safe anymore and the market is falling.

Eric Solis: Dollar cost averaging is the smartest long term strategy for these types of markets. Invest regularly and if you can do it every day. The markets are extremely volatile that it is important to invest as often as you can. DRIP programs are another good idea. Remember to diversify and do not operate from fear. Be intentional.

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Alexandria, Va.: To sort of piggy back on the last question about creidt unions- do you think they are a better choice for consumers as a whole?

Eric Solis: Diversification is the key to any good plan. Manage your money in accordance with your long range needs, goals and objectives. Where you put your money aught to be a reflection of your plan. Banks and credit unions serve a purpose. Do not make them the center of your plan.

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Taos, N.M.: My 90-year-old mother's income and expenses are managed through a trust administered by Wachovia. If Wachovia were to fail, would the trust assets be affected?

Eric Solis: They are varying relationships that exist under a trustee relationship. But, usually the trust department of a bank handles the administration of the trust and they may formulate an investment policy and even have discretion over the investment decisions. It is common for them to use outside money managers who hold the securities at a brokerage firm who then supply statements to the trustee. The trustee will provide performance reports etc. However, it is important to confirm that the trust officer has not deposited money into hi parent company bank that exceeds FDIC coverage as this would be a violation of his fiduciary responsibilities.

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So basically...: we should make sure we don't have more than the amount FDIC insures in any account and then hold tight. Right?

Nancy Trejos: Not exactly. It's not $100,000 in any one account. The FDIC insures $100,000 PER depositor PER insured savings association. So you can have $50,000 in a savings account and $50,000 in a CD in one bank, and you will be fine. No matter what happens to that bank, your money will be safe.

Now, there are ways to get coverage above the $100,000 even if you have it all in one bank depending on what type of ownership category your accounts fall under. For example, if you've got an account in your own name and a joint account with someone else, then you might get protection above the limit.

Each individual situation is different, so I would highly recommend going to www.fdic.gov and using the Electronic Deposit Insurance Estimator, or EDIE, to figure out exactly how much of your money will be protected. Or you can always talk to your bank manager.

But remember, do not panic if you don't have anything beyond that $100,000. And if you've got more than $100,000 and really want to be safe, spread it out over a couple of banks.

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Columbia, Md.: Are the non-insured money market funds run by financial services companies such as Metlife and Capital One likely to be safe?

Eric Solis: Yes, this sort of security invests in short term debt instruments and is s designed to remain at a fixed price of $1. A mutual fund is a security not a bank deposit and therefor funds are segregated. It is important to understand the parameters of the fund in regard to the quality. Far a safe minded person may want to stick to money markets that invest strictly in government backed securities.

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Brant Beach, N.J.: What is a DRIP program and any suggestions on where to put the money now for dollar cost averaging?

Eric Solis: A Drip program is an acronym for a dividend reinvestment program. This type of investment strategy can be any dollar cost averaging program or systematic investment program. Save252.com is the company I founded which helps people with modest means to begin saving each and every day that the financial markets are open with as little as $1. The system handles all of the administration of the account allowing you to "set it and forget it".

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Leon Springs, Texas: All this handwringing over Fannie and Freddie and the housing crisis masks the real problem in this country - and that's the fact that wages have not gone up for average Americans in a long, long time. The economy has been fueled by consumers spending their supposed home equity, while incomes have stagnated for all but those on the highest rungs of corporate america or pop culture. Wouldn't ya say??

Eric Solis: You touch on an interesting point. Productivity gains have gone to equity holders. Labor has expanded world wide and in some cases it is valued at zero. Sad but true. So holding equity becomes an important part of reaping the benefit of productivity. Have a long term plan for investing...that is the key.

Nancy Trejos: Very good point. Yes, during the real estate boom, people used their homes as piggy banks, tapping into their equity to pay off their car loans and their credit card debt and their student loan debt. With home prices dropping in most places, the home equity has dried up. Credit was easy to get and many people went for it. Now we are a nation of people in debt. And you're right, everything is getting more expensive: food, gas, even movies. And wages are not keeping up. So if people are struggling just to pay for the basics, what are they going to have left over to pay off their debt? It's just not a good situation.

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100K, 500K or both?: The answer about securities confused me.

1st answer: our account at the securities firm is segregated from the banks assets and they are insured by the Securities Insurance Protection Corporation (SIPC) up to $500,000.

2nd answer: Eric Solis: Security accounts are held separately. They are not under the bank umbrella. Broker dealers are covered under SIPC and are insured up to $100,000.

Did you misstype or is there a subtle distinction I missed?

Let me ask it this way. I have over 300K in a 401K account at Schwabb, is a 401K account like that covered at 100K, 500K or some other number.

Eric Solis: Sorry, my error, supposed to be $500,000

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Alexandria, Va.: I think I could be in trouble here - my assets at Wachovia total to more than 100K. What's the best way to get the balance after the 100K that's FDIC insured to another institution? HELP, I am freaking out here. Thanks.

Eric Solis: There are several ways, choosing the best depends on your situation. You can ask for a cashiers check or have them wire the funds to a new financial institution. If you exceed the amt of coverage and the bank fails, typically you will get back 1/2 of the money that exceeds coverage as an advanvced dividend. however the smart thing is to take action prior to a problem occuring. Keep your peace, dont panic!

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Arlington, Va.: I own a small business (3 employees) and I have several vehicles under a business account (checking acct, money market acct, cd) that, combined, are great than 100K at Wachovia. Does the FDIC 100K insurance cap effect business accounts as well?

Eric Solis: Yes, business accounts and trust accounts are treated the same as individual accounts and are subject to the same covereage limitations

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Silver Spring, Md.: Say you have two accounts that total over $100,000 at the same bank but are each under $100,000. Is all your money insured? Or is there more you need to do?

Nancy Trejos: If they total more than $100,000 at the same bank then you are not guaranteed coverage above that $100,000 even if each separate account has less than that limit.

That said, there are complicated FDIC rules that could apply to you that would increase your protection above the limit. It really all depends on how your accounts are structured. What kind of accounts are they? Are they retirement accounts (for instance, an IRA and some other types of retirement accounts are insured up to $250,000)? Are they savings accounts? Are they all in your name or are they under different names or an LLC? You really need to sit down and figure it out and then go to www.fdic.gov and click on EDIE on the right-hand side. That stands for the Electronic Deposit Insurance Estimator and it should help you figure out exactly how much coverage you have.

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Laurel, Md.: Can you use interest rates on checking, savings and money market accounts as indicators for failing institutions. My current institution has dropped from over 4 percent to 0.65 percent in the past 8 months on my highest yield account. I was already planning to pull out because the accounts are stagnating. Should I accellerate my transfer to another institution because of the plummeting rates?

Eric Solis: Good question, and the answer is, yes you can get a sense of whether a bank needs deposits, but its counterintuitive. A bank that is loweing its rate is actually sending a signal that it doesnt need deposits. While a bank that is paying above market rates may need the liquidity and therefore is looking to attract deposits. The problem is this is defined as "hot money", i.e. money looking for the highest interest rates. The concern with this is that "easy come,easy go"

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Victorville, Calif.: I have two trust accounts in one FDIC insured bank which together total $155,000. My understanding is as long as beneficiaries are listed on the bank paperwork for each account, though not included in the legal title of the trust itself (yet listed within the body of the trust), the accounts are given additional FDIC insurance. Depending upon the number of beneficiaries listed, FDIC coverage can increase up to $250,000. Is that correct information, which means the two trusts will be fully covered for FDIC insurance?

Eric Solis: Their understanding seems to me to be correct. However, $55,000 is a lot of money and a quick phone call to the bank to confirm thier understanding would be time very well spent. It's in the details that mistakes are made.

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Rockville Md.: Hi, Can you address the safety of deposits at the Internet banks, especially the larger ones like ING Direct, Emigrant Direct, etc. ING Direct had been agressively advertising and seeking customers through cash incentives for opening accounts. These banks gave much higher interest rates than the standard banks a few years ago and Kiplinger and other publications had written articles about them.

Eric Solis: Without passing any judgemnt on the names listed below it is a fact that "hot money" has made its way into internet banking. The efficiencies that online banks enjoy is real and does afford them the opportunity to pay higher interest rates. However, it is even more important stay well within the guidlines of FDIC when dealing with one of these new breed banks.

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Re: Beaufort, S.C.: I was watching the news yesterday and they said that the $100K insurance is per person, not per account/bank. It seems your advice to Beaufort implies that it's $100K insurance is per person and per bank.

Am I misreading what you were saying? Thanks.

Eric Solis: The answer to your riddle is that coverage is $100,000 per person per bank, not cummulative. There are ways that you can have more that $100,000, for example, retirement accounts are insured up to $250,000 and certain accounts like totten trust etc.listing seperate beneficiaries can also garner more coverage but one must be very cautious when setting these types of accounts up.

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Nancy Trejos: Thank you all for joining us today. Judging by all the questions we got, this is obviously a topic that is concerning a lot of people. Eric and I are sorry we couldn't get to all your questions. But please check out www.fdic.gov. It's got tons of information about all this. Thanks again.

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Eric Solis: It was a pleasure to be with you today and remember that those 4 words on the bank of every dollar "in God we trust"

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