The vicious circle: Bank stock investors vote with their feet, fearing that many depositors might do the same

The sight of depositors lined up outside IndyMac Bank branches today to pull their money can’t be giving comfort to bank regulators.

It gave none to bank stock investors: Wall Street hammered bank shares across the board. The BKX index of 24 major and regional bank issues plunged 8.5%, deepening its year-to-date loss to 43%.

Check out the day’s percentage declines in National City Corp., Washington Mutual, Zions Bancorp and Downey Financial, to name just four.

Investors who are dumping bank stocks, even at these severely depressed levels, are voting with their feet. The question is, how many bank depositors around the nation today are doing the same?

There’s the potential for a vicious circle here: Investors fear bank failures, so they pound the stocks. Depositors, seeing Wall Street’s reaction, begin to pull their funds, worrying (probably needlessly) that their money is in another IndyMac. A deposit run then can turn a reasonably healthy bank into a problem bank in a hurry.

Sheila Bair, head of the Federal Deposit Insurance Corp., is trying her best to induce calm, saying over the weekend that "the overwhelming majority of banks in this country are safe and sound."

But we’re in an environment where there has been no payoff for taking chances in the financial system.

By the FDIC’s count, about 10,000 IndyMac customers held a total of $1 billion in uninsured deposits in the bank. If those customers believed that the deposit insurance limit didn’t matter -- and that the government would back all of their savings if IndyMac failed -- they have just now come to realize how wrong they were.

Too late.

If you’re over the FDIC’s insurance limit at IndyMac, the agency will let you pull out half of whatever you have on deposit above the limit. Then you’ll wait to find out what the FDIC can get as it sells off IndyMac’s assets.

The FDIC can’t predict what portion of the remaining uninsured deposits, if any, will be repaid.

That is a horrible situation for those depositors. They should have known better, but they either ignored the insurance limits or put off doing something about their funds.

So we can imagine what’s going on around the nation today. How many bank customers, now realizing that it is possible to lose money if your deposits exceed the federal insurance limits, are trying to make sure that they don’t repeat IndyMac customers’ grave mistake?

The banks aren’t going to tell us if they’re facing a wave of customers either withdrawing money to get below the FDIC’s limits or restructuring their accounts to stay within those limits. It isn’t in any bank’s interest to be that upfront.

The FDIC may be right when it says the risk of your bank failing is extremely low. But the fate of uninsured depositors at IndyMac is a bell-ringer. It says you can lose.

For many Americans, that now may be all they need to know.

Photo: Customers wait outside of IndyMac's headquarters office in Pasadena today. Al Seib / Los Angeles Times

Comments

[plankbob]

Sheila Bair, head of the Federal Deposit Insurance Corp., is trying her best to induce calm, saying over the weekend that "the overwhelming majority of banks in this country are safe and sound."

"In most of the cities and towns of this country, this Wall Street panic will have no effect." -- Paul Block (President of the Block newspaper chain), editorial, Nov. 15, 1929

"For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over." -- Business Week, Nov. 2, 1929

"Unless we are to have a panic, which no one seriously believes, stocks have hit bottom." -- R. W. McNeal, financial analyst, October 1929

"Gentleman, you have come sixty days too late. The depression is over."
-- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

[jb]

private gains, public losses - this country is crooked from the top down. These bank execs had huge bonuses year after year when their sole job is to manage risk. Now they want to be rescued.

We should burn this country to the ground and start over with a system that is fair.

[Michael]

Okay, this isn't really news and it's certainly not bloggable. Everyone in the Internet has reported the collapse of the bank.

For a fresh angle, why not find one of the 10,000 people who collectively kept more than $1 billion in uninsured accounts with the bank, and ask them _why_ they decided to do that?

[QuietRiot]

CAPITALISM WITH REGULATION IS LICENSE NOT LIBERTY.

No man's life, liberty, or property are safe while the legislature is in session.
Gideon J. Tucker in Final Accounting in the Estate of A. B. (1866)

[Walter L. Johnson]

This sounds like a great time to be buying bank stocks as long as the portfolio is well distributed within banking so that total losses on some won't matter in a couple of years.

No one thinks all the banks in the U. S. are suddenly going to fail and most don't even have large exposure to risky mortgages since they resold all but the servicing rights to those loans, so buying bank stocks cheap now would seem to make a lot of sense--as long as no one bets on just a small cluster of different banks, but on the whole banking sector.

[coakl]

Is Washington Mutual the next bank to fail? Perhaps.

If Wamu's estimated losses are not much larger than what is projected ($23.5 billion over the next 3 years) and its earnings come in as expected, Wamu might survive. Otherwise, they are toast.

Because most of Wamu's loans were made in California, Florida, and Nevada, the three states hardest hit by the bubble collapse, it's anyone's guess what the losses will be. Most of Wamu's loans were "low-doc" or Alt-A, rather than sub-prime. But are they just as likely to default as their sub-prime cousins?

Read this New York Times entry: http://dealbook.blogs.nytimes.com/2008/06/25/washington-mutual-may-not-have-tap-more-cash-analyst-says/

[Dr. Phibes]

Where is the bottom in bank stocks?

[mike r]

if a person has more than 100,000 in a bank with fdic insurance and has a joint account with their wife and children listed as payble upon death, are they covered for 100,000 per person?

[martscan]

Dr. Phibes: The 64 Dollar question...and impossible to answer. Not only from the standpoint of "...bottom in bank stocks?", but also, WHICH bank stocks. There are presently 90 banks on regulators' "watch" list. Freddie and Fannie are most probably in a negative net worth position, the way the Fed is going with "Billionaire Socialism", they are ruining their own balance sheet, we may emulate Japan's "lost decade", inflation will be the real bugaboo...forget bank stocks (I just ate a chunk bottom picking IMB), sell 30 yr Treasuries...on a scale up to your max spec allotment...$2800 gets you short $100K...if you're playing with, say, $100K, do 20 to start..pyramid...and be patient...this trade could easily be worth $1M.

[eve]

Why is the government bailing out banks? It's ridiculous. If you think it's crazy now, you haven't seen anything yet. The more financial institutions that are bailed out, the more panic we'll see. These comments made by politicians are irresponsible. Bailing out industries does nothing but instill terror in the American public. Manipulation in the media is ridiculous. Well, why am I surprised, it's election year.

[blackbox]

stupid, stupid ignorant people. This shows why society can quickly decent into anarchy with just a little bump in the road. #1 if you had less then $100k in the bank, your money as safe as any bank in the world. It is backed by the United States of America. If that's not safe, then nobody's money is safe anywhere. If you have more then $100K in the same bank, your a freaking idiot! The FDIC rules have been around forever, and for people to have not known or ignored the insured limits is insane, and they are lucky to get 50% upfront over the $100K limit. Its not unbelievable that a bank failed in the USA (happens all the time). Its unbelievable that we still have idiots that have more then the insured amount in any bank. Although I am not surprised that we still have ignorant people who cause a run on the bank and panic although there money is insured and as safe as any Americans money in any bank........................

[Derek]

The general rule is $100K per person per institution. If your married and the account is held jointly (meaning equal rights to withdrawal and control), then you have $200k of coverage. For children it's more complicated - but w/ payable on Death (POD), it's $100K per beneficiary.

If your holding more than $100k per person of non-retirement funds (not 401K / IRA), I would seriously consider spreading that money out. Retirement fund coverage is $250K per person per institution. Here is a quick guide to help understand your FDIC insurance coverage:

http://www.fdic.gov/deposit/deposits/insured/yid.pdf

[Shaun Rosenberg]

I would never keep more then $100,000 in a bank anyway. If you do it is just sitting there losing value. I would rather have the money in some appreciating asset.

[eric]

Please tell me someone where is the bottom in bank stocks.
_________________
Eric
http://www.widecircles.name