IndyMac Goes Down – Largest Bank Failure EVER
Photo from LA Times
That minor recession that John McCain’s erstwhile economic advisor informed us just last week is “all in our heads” got worse as FDIC moved on Friday to take over Pasadena’s IndyMac Bank. Their audit showed that a surprising number of deposits exceed insurance coverage limits, and when the bank goes down that money is gone… poof, disappeared, “liquidated” by economic reality. According to the Wall Street Journal, this works out to about 10,000 people whose money was in IndyMac – 5% of their total deposit base – who will now have to “learn a lesson” about not putting all their golden eggs in one basket.
The FDIC Quarterly Banking Profile doesn’t look very promising either, so it’s important for people to realize that they are only guaranteed return of $100,000 in regular deposits, or $250,000 in retirement accounts (including accrued interest). Given what has happened in the past as corporations decide unilaterally to loot their portions of retirement accounts in order to try and stay afloat, if things get bad enough the retirement savings of Baby Boomers may well be in jeopardy.
Since 2007 there have been 8 bank/thrift failures, nowhere near the level of failures during either the Great Depression or the notorious S&L ‘crisis’ of the 1980s. But that can change rather quickly, so if you’ve some real money in the bank – particularly in the kind of retirement account we’ve been told for years we’ll need in order to live well in our old age – you may want to divvy it up into more than one institution so the full amount is covered.
Now, unless you’re rich enough to not be living on a shoestring budget, this one’s probably not going to affect many regular people in whose minds Phil Gramm tells us the recession originates. Yet as municipalities and local businesses that often have hundreds of thousands of dollars in a single local bank shift their deposits to larger institutions or split them off in insurable chunks, many local banks and thrifts will find themselves insolvent.
The FDIC will have pay for losses to the insured limit, but that can take time. Particularly if the house of cards comes down pretty much all at once, and there are no ready buyers. Sure, it’s all just paper or electronic bits (so it doesn’t really matter who’s got your ‘money’ so long as it’s less than the limits), a lot of us can’t easily go a week with no access to our direct-deposit paychecks or some ready cash when our debit card doesn’t work in any ATM or grocery store anymore because the bank’s out of business. It takes even more time if there’s a buyer for the bank, as all the piddly detail stuff has to be done over – new debit cards, new checks, etc., and switching your direct income and payments can be a big hassle.
Best advice I’ve seen is to go ahead and pay down your credit cards significantly right now as much as you can, then keep your balance low so they’ll still be available if you need to float for a month or two. You should also take out enough cash to cover your family’s costs for a full week, two is better, and keep it in a cookie jar (or freezer bag). Any bills you pay on line (electric bills, phone bills, mortgage, credit cards) may be adversely affected for the same period of time. You may want to cancel direct deposits and withdrawals now, write regular old checks and send them out snail-mail so you don’t end up phone-less or without electricity and don’t get slammed with late charges should your bank fail.
FDIC predicts that IndyMac may cost the fund between $4 and $8 billion dollars, making it the most expensive bank failure EVER. If more banks fail, other financial institutions will have to pay more into the fund and that will affect THEIR bottom lines. At some point the actual taxpayers will have to start footing the bill (as we are now doing for the bulk of Bear-Stearns’ losses), the Fed will have to print up some more funny money, and our foreign creditors – the ones who have been financing the BushCo spending spree (primarily China) may panic and start dumping paper.
…at which point our “mental recession” turns into a worldwide mess of epic proportions.
I admit that I’ve never spent much time or brain cells on trying to understand much about the magic of capitalism, since I’ve never had enough money to play such games or care about those who do. But I do know that those at the lower end of the economic scale are the ones who will suffer most from what Wall Street likes to call “corrections” in the national economy. I’ve put two weeks’ worth of cash into a freezer bag. It’s not earning any interest, but we had enough to cover that and won’t spend it unless we have to. Just knowing it’s there makes me feel better, though I’m hoping Bank of America manages to weather the coming storm. …mostly because if it goes down, nobody’s money in any institution is safe.
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