Is Your Bank Safe?

The collapse of IndyMac has banks in customer-reassurance mode. But it just points to the lack of consumer information about bank solvency

Nothing says hard times like people standing outside a bank demanding their money. IndyMac Bancorp's (IDMC) failure and the resulting chaos were reminiscent of Depression-era bank runs even if the country's economic condition doesn't marginally resemble that era. But in an economic slowdown with few visual reference points—what does a subprime loan look like anyway?—IndyMac's failure carried a clear message for some: Stick your money under the mattress.

Banks and federal officials have worked diligently in recent days to make images of bank runs vanish. Some banks are now issuing tellers talking points to use to reassure customers that their money is safe, housed by an institution that is well-capitalized. BankAtlantic, a Florida-based regional bank, even sued an analyst after he pegged its parent BankAtlantic Bancorp (BBX) near the top of a list that could be "next" after IndyMac. "A falsehood, when widely circulated, becomes its own truth," the bank's lawsuit says.

But critics contend that a dearth of information will only make customers more suspicious and open the door to dangerous rumors. Since IndyMac's failure, (BusinessWeek, 7/23/08) everyone from Treasury Secretary Henry Paulson to bureaucrats at the Federal Deposit Insurance Corp. have hit the media trail to reassure depositors their money is safe. Their chief message is built on the federal guaranty behind every deposit up to $100,000, even in cases where a bank collapses. Joint accounts, retirement accounts, and trusts are also insured, up to a limit.

FDIC's Mixed Signals

But even as they explain the process, regulators are not willing to tell consumers everything. For instance, the FDIC compiles a quarterly watch list of troubled banks; there are 90 (out of 8,494 FDIC-insured banks) currently considered to be on shaky financial footing. The agency assesses each bank's capital position, the quality of its assets, and its management team, its earnings, its liquidity position, and the bank's sensitivity to broader market forces.

That list "is going to grow longer, given the stresses we have in the marketplace, given the housing correction," Paulson said on July 20 in an interview with CBS's Face the Nation. Just don't ask for the names of any banks on the list. The FDIC cannot discuss which firms are in danger of failing, given that the agency collects proprietary data from each bank and says it would be unfair to use the information to expose them publicly. Such a release could also cause undue alarm, says FDIC spokeswoman Lajuan Williams-Dickerson, because "most banks on the problem list are very unlikely to fail."

To some consumer advocates, that position seems to contradict the agency's stated goal of increasing consumer awareness. "On the one hand, the FDIC is promoting consumer education and empowering people," says Joe Ridout, a spokesman for Consumer Action, a national consumer education and advocacy group. "But on the other hand, the FDIC is withholding the most critical piece of information." FDIC officials said the agency makes available reams of data that customers can use to determine whether their bank is healthy.

Insurance Limits Last Raised in 1980

To be sure, far fewer banks are in trouble these days than during past downturns. Despite a wave of bank writedowns (BusinessWeek, 7/16/08) that have so far topped $400 billion to date, only seven banks have failed in 2008, compared to the hundreds that failed during the late 1980s and early 1990s. In 1990, about 10% of the 15,000 FDIC-insured banks were on the agency's problem list, compared with only about 1% today, FDIC spokesman David Barr said. But that doesn't mean there's no cause for concern. Many more people now have deposits that are above FDIC-insured limits, meaning that if their bank failed they might get only a portion of that money back. In 1991, 82% of deposits were insured, according to FDIC estimates. The $100,000 insurance limit hasn't been raised since 1980. Today, only about 62% are insured.

Banks are certainly paying renewed attention to deposits. They are perhaps the most plain-vanilla products in a bank's repertoire, but their importance has been reinforced by the industry's current problems. Checking accounts, savings accounts, money-market accounts, and certificates of deposit give banks ready access to cheap cash with which to make loans. Without a strong base of deposits, a bank is doomed. While writedowns will slowly erode a bank's balance sheet over several quarters, a run on deposits can hurt it far more quickly.

In IndyMac's case, that process took just 11 business days. The Pasadena (Calif.)-based bank was founded in 1985 as Countrywide Mortgage Investment by Angelo Mozilo and David Loeb, who ran the bank in tandem with mortgage firm Countrywide Financial. With total assets of $32 billion, IndyMac became the second-largest financial institution in U.S. history to collapse, after the 1984 failure of Continental Illinois. The Office of Thrift Supervision (OTS), a division of the Treasury Dept., says the run started after Senator Charles Schumer (D-N.Y.) sent a letter to federal regulators on June 26 expressing concern about IndyMac's financial state. When the letter went public, IndyMac's customers rushed to bank branches to yank their money. After the dust settled, IndyMac was $1.3 billion poorer and no longer able to pay its creditors. On July 11, federal regulators took it over. On July 25, the government seized two small Western banks, First National Bank of Nevada and First Heritage Bank, of Newport Beach, Calif. Combined, the two most recent failed banks had 28 branches and assets of $3.6 billion. Mutual of Omaha Bank took over the banks' deposits and will serve the accounts.

Feds Asleep at the Switch?

For the vast majority of IndyMac customers, withdrawing their money made little sense. Only about 5% had deposits that were not insured, says Barr, the FDIC spokesman. But bad news tends to cascade, and once the run began it gained momentum. Regulators and bank officials placed much of the blame on Schumer and his "interference in the regulatory process." Schumer pointed his finger in the other direction, saying regulators sought to "blame the fire on the person who calls 911." "The breadth and depth of the problems at IndyMac were apparent for years and they accelerated in the last six months," Schumer said in a statement. "But the OTS was asleep at the switch and allowed things to happen without restraint."

Schumer isn't the only one who has taken lumps for speaking up about banks. Richard Bove, an analyst at Ladenburg Thalmann (LTS), was sued along with his firm on July 21 by BankAtlantic, which accused him of defamation and negligence. Bove had placed BankAtlantic's parent company, BankAtlantic Bancorp, near the top of a list he released on July 13 ranking institutions based on their volume of nonperforming assets. In the suit the bank charged that Bove's report "relied upon, asserted, and implied demonstrably and obviously false facts about the financial condition of BankAtlantic and Bancorp."

In Florida, as in many other states, spreading false rumors about a bank is illegal. Eugene Stearns, a lawyer for BankAtlantic, said the bank is healthy and Bove used "the wrong numbers" to compile his report because he relied on a research firm's analysis of data rather than FDIC numbers. The suit particularly notes the danger of a bank run spurred by false information. Bove declined to comment on the lawsuit. Asked if he would continue making lists of troubled banks, he said, "I have no need to change anything I'm doing."

Wachovia Says It's All Right

Stearns said he thinks Bove's report gained prominence in part because the FDIC's list is secret and people are hungry for information. "Because he was the only one to step up when the FDIC wouldn't list the banks that are in trouble, this story was repeated over and over," Stearns said. Data on banks can be hard to come by. Mark Fitzgibbon, a principal at investment bank Sandler O'Neill & Partners, published a report on July 15 about U.S. banks with the most "jumbo" deposits, which have a $100,000 minimum and are less likely to be covered by FDIC insurance. Within days the firm called it "outdated" and would not release it. Fitzgibbon did not respond to several requests for comment; the firm declined to comment.

Indeed, anxiety is high in the industry. Many banks have started their own campaigns to reassure customers that they're not going anywhere. Wachovia's (WB) new president and CEO, Robert Steel, is featured in a video on the company's Web site aimed at bank customers. "Although the nation's financial news lately has been a bit troubling and Wachovia certainly isn't immune, I want you to know that our company is on exceptionally sound footing," he says. Steel goes on to list the bank's capital ($50 billion), liquid funding capability ($150 billion), and says the bank has enough cash to meet its current long-term debt obligations for three and a half years. "My point in telling you all this isn't to brag or illuminate issues in the overall economy," he said. "I want you to know that Wachovia is ready to do business."

Other regional institutions have encouraged branch employees to talk about their bank's financial condition with customers. Associated Banc-Corp. (ASBC), a regional bank based in Green Bay, Wis., issued talking points to tellers and other bank employees the week after IndyMac's demise. It wanted customers to know, among other things, that it was well-capitalized and had issued dividends for 154 consecutive quarters. "We encourage all of our folks to engage in conversations" about the bank, says Dave Stein, Associated's director of retail banking. "Often it starts with 'Wow, it's a tough time in the industry.' That's when our folks go into a nice job of launching" into the talking points. Associated has seen double-digit growth across all deposit categories over the past 30 days, says Janet Ford, a spokeswoman for the bank.

Deposits Don't Move Often

Because comprehensive FDIC data have not been released since the IndyMac closing, it's too early to tell which banks are seeing more deposits and which are seeing fewer. In general, it's rare for an average retail customer to move deposits around much, in part because it takes time and often costs to set up an account at a new bank, said Derek Ferber, an analyst at SNL Financial.

But even as banks try to reassure their customers, they are competing with increasingly vocal skeptics. Lists of troubled institutions continue to proliferate on the Internet. Aaron Krowne, a 28-year-old from Atlanta, started a series of blogs in 2006 called Implode-o-meters covering various industries, including hedge funds, mortgage lenders, and banks. Krowne, who has a background in computer science, considers himself an "armchair economist," but he partners with more established industry experts to compile the lists. He hopes the sites become the base of a successful media company. On Krowne's Bank Implode-o-meter, he lists the failed banks and credit unions. Next to them is a list called "Writedown, Rundown, and General Distress" listing banks that could be in trouble.

Krowne contends the banking and mortgage industries have not been telling consumers and investors the truth, and his job is to "put some counterspin on it." His mortgage site was sued after it posted an e-mail from a whistleblower, but the bank site "hasn't received even a single nasty-gram." He said he does not claim banks are insolvent, and just highlights their trouble spots. Ridout, of Consumer Action, says such sites are subject to rumor and innuendo, but adds that Krowne's bank-monitoring site proved prescient on IndyMac, spotlighting troublesome signs well before the bank was seized by regulators.

So which bank will be next to fail? "I do have a sense but I can't tell you," says Krowne, "because then I would be spreading panic."

Business Exchange related topics:Financial Services IndustryBailoutBank NationalizationCredit Crunch

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