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Letter Re: Gauging Bank and Thrift Safety
James,
I wrote you a month or two ago regarding a post of yours that was concerned
about failing banks. I commented that I thought the worries were overblown
- there was no reason to think that FDIC wouldn't pay off the claims, just
as FSLIC paid off the claims in the 1980s. I still think that's true, but I
have had a personal cautionary experience that has moved me much closer to
your way of thinking.
I had a brokered Certificate of Deposit (CD)
issued by IndyMac. (In case you post this, for readers unfamiliar with the
term, "brokered" mean
I bought it through a broker, like a bond or stock. Banks that want to raise
a lot of
money
aggressively
issue brokered CDs to attract "hot" money, money that flows in quickly
and can flow out just as quickly; FDIC doesn't much like such CDs, for obvious
reasons.) It had a few months to go when IndyMac failed. FDIC announced that
they would honor the terms and rates for non-brokered CDs, but would simply
terminate brokered CDs and return principal and interest up to the day the
bank failed to the owners.
So that's problem #1: FDIC just made up the rules as it went along. Why was
my CD different from others? Because they said so, pure and simple. They would
claim it's for the overall good, because it discourages brokered CDs, which
can make banks more prone to runs, but that doesn't help me, does it? And it's
not like they had announced this ahead of time. So I lose money, and there's
no way I could have known to avoid it. (IndyMac wasn't on their trouble list
when I bought the CD.)
Problem #2: not only didn't the money show up in my brokerage account right
away, I couldn't even find out when it would show up. It was more than two
weeks before it appeared, and I got no interest for that time.
Neither problem was significant in this instance; it wasn't a big CD and it
didn't have much longer to maturity, and the delay wasn't very long. But it
was a powerful experience in terms of opening my eyes to what might happen
under greater financial stress. If FDIC can delay returning the money for two
weeks with no interest, they can do it for two months, or however long they
need to. Clearly, beyond the basic insurance act of eventually returning money
earned up to the date of bank failure, everything else is up to the FDIC's
whim. That doesn't give me a good feeling.
The best way to avoid this is to choose strong banks. One resource I've found
useful in the past is thestreet.com ratings. This used to be called Weiss Research,
and they are clearly an independent source of analysis of bank strength and
safety. Their home page
says: "We don't accept compensation from the companies we rate for issuing
the rating. Nor do we give the companies an opportunity to preview the ratings
or suppress
their publication if they're unfavorable. We are totally independent and unbiased
because our loyalty is to you -- the customer."
If you go to The
Street.com's Rating Page and select
Banks and Thrifts, you can then type in the name of a bank you want to check,
and click Go. They will list the matches, with letter grades from A+ on down.
You can then click on a bank name and download a more detailed report, but
for my purposes the letter grade has been enough to tell me whether I'm about
to make a mistake. Keep up the good work! - Michael A. in Seattle
