Today's New York Times has a startling article online about Indymac Bancorp, which says it "will eliminate 3,800 jobs and stop making most home loans after regulators concluded it was no longer 'well-capitalized.'"
With so many of Indymac's customers withdrawing deposit funds at such a rapid rate - $100 million last week, according to the Los Angeles Business Journal - it reinforces to me one of the key decisions made when starting MoneyAisle: all of the banks in our network must not be rated low by the reputable bank rating firm we use. If the bank does not meet these standards (meaning: if it does not have sufficient deposit funds on hand) then it will not be among the many higher-rated banks bidding for your business during a MoneyAisle auction. It's yet another safeguard we use to protect your money and investments.
Monday, July 7, 2008
On Indymac Bank's Troubles and Protecting Your CD and High-Yield Savings Investments
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4 comments:
I'm not sure if you meant to use the FDIC term of "well capitalized" which means a Total Risk-Based Capital Ratio above 10%. Up until the 7/7 press release Indymac was considered "well capitalized". Secondly as most rating agencies can only work from published data, and these days a bank's financials can change dramatically, making sure you remain under the FDIC protection is key.
Generally, if a bank fails, funds are returned in 7 to 10 days. So the real risk is re-investment risk. That is, will the rates that are available at the time of a failure be higher or lower.
Thanks for the comment, CD Rates Blog.
As far as the ratings go, there was a rather meaningful difference from two separate rating agencies in the preceding few months for the same bank, apparently one got it right and the other one was off. To make matters worse, the lack of a common standard among rating agencies makes it much more difficult for a consumer to do an “apple to apple” comparison and draw a reasonable conclusion.
In addition to the re-investment risk (which, if memory serves, is what happened when NetBank failed last year), there are other risks - even if you are below the FDIC limit due to a delay in receiving funds. Some examples: If you are scheduled to make a down-payment on a mortgage there could be serious penalties which the FDIC does not cover; if college tuition is due; if a big credit card bill is due (which may invite serious penalties); failure to make a home insurance payment, etc.
I'll go into greater detail about this in a future blog entry.
I will look forward to that post. I don't mean to be argumentative, but it seems like the other risks you laid out would be somewhat remote. Your house payment could accidently be mailed to belgium (yes, that did happen to me).
It is always best to make sure all your eggs aren't in one basket, that necessary contingency plans are in place, and you have the direct number of your mortgage processor. :O)
Keep up the good posts. I'll be back.
Right on, Mukesh!
The backbone of the world's economy rests with the trust and confidence of the banking system. Therefore, the secondary effects of an FDIC takeover of a bank like IndyMac, or for that matter, the rumors about the stability of FannieMae and FreddieMac, are likely bigger problems than the re-investment risk of a relatively small group of depositors. These secondary effects are big multipliers, and they can take a long time (years, not days) to play out.
Congratulations on the launch of MoneyAisle! I just auctioned off some of my money for the first time this morning and so far the experience has been great!
Best regards,
Eric
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