by Silicon Valley Blogger on 2008-09-16 22

Do you think your bank is in trouble? Worried about your savings accounts in problem banks? Some musings on the banking and financial crisis and the plight of troubled banks.

I took a few days to absorb the latest news in the financial industry; if you read the mainstream media these days, its as if financial armageddon is upon us. Do you remember any of these jaw-dropping stories from your local paper?

Drama In Wall Street

• Lehman Brothers files for bankruptcy. A potential buyer (Barclays) balked as a buyer.
• Merrill Lynch is taken over by Bank of America.
• AIG, a large insurance company, got a forced restructuring.
• Several global banks are setting up a $70 billion loan program for troubled institutions.
• The Federal Reserve is taking steps to better its lending programs.

When we read something along these lines, we often wonder whats next for savings account rates and our high yield savings accounts. During times of financial upheaval, the government tries to do its best to calm the crazy markets and to ensure liquidity in our financial systems.

But, with these financial institutions falling like dominoes, you may wonder how nervous should you be? Well, theres SIPC protection for investment accounts and FDIC protection for bank accounts. At this time, its important that we understand the details of what SIPC and FDIC coverage will do for us, as there are some limitations to their reach and there are specific applications for them.

Because of such coverage, Im not particularly concerned by losses due to a bank or brokerage failure, but I do wonder: in what state can I expect to find my money if my bank fails. and how big an inconvenience is it going to be to have to deal with my accounts in limbo? How much should I worry?

Problem Banks and The Accounts You Have With Them

Several other bloggers have tackled this issue in the past, particularly when discussing the demise of IndyMac Bank. a thrift that went under a few months ago as the second biggest failed bank in the U.S. Id like to chime in with my thoughts on this topic in light of economic events and shocks in the stock market:

#1 Youre okay if your money stays within SIPC and FDIC limits.

If your bank or brokerage folds, youll get your money returned to you if you are within insurance guidelines. For FDIC, its $100,000 per depositor in individual accounts, $250,000 in retirement accounts; for SIPC, its $500,000 per account (regardless of type or registration). Interestingly, if youve got accounts properly structured at your bank, you and your spouse may have as much as $1.1 million in deposits insured at your bank. If youve got money outside of that coverage, you become a creditor of the bank, and youll fall in line to get your money back equivalent to 40 cents to 100 cents on the dollar (averaging 72 cents on the dollar) depending on how the FDIC conducts the sales of assets of your bank.

#2 Struggling financial institutions continue to function in some capacity even after they fail.

Such companies are ultimately taken over by the FDIC (they declare bankruptcy) or by another company that absorbs them. The larger they are, the less likely it will be that theyll just up and disappear leaving you with losses. In past cases, a bank in trouble will be bought out by another, will merge with some other entity and keep doing business as usual. Bankrate states that most of the time, the average bank customer is unaware that changes are going on behind the scenes. The FDIC facilitates the transfer of ownership and assets of one bank to an acquiring bank.

#3 Acquired banks have it easier than those that file for bankruptcy.

Normally, youll be able to use your cards, checks and other tools if the bank is simply in a buyout transition. But you may be more inconvenienced if your bank goes bankrupt: in this case, you can probably expect your assets under FDIC protection to be mailed to you expeditiously and you may have to review your accounts for pending transactions youll need to address and resolve in some other manner (e.g. your direct deposits and payouts to merchants) outside of your banks systems. Reconciling all that just means extra work for us when were busy enough as it is. Not fun.

Case Study: Washington Mutual

This all brings to the forefront the plight of a popular bank among bloggers one which weve brought to your attention in the past, due to the great interest rates it has been offering. Because of whats been happening, Ive been keeping a close eye on Washington Mutual, which has been widely cited as one of those vulnerable banks on the brink. The latest on this bank is that its S & P financial rating has been cut to junk status and that some suitors are knocking at its door.

Ive written about WaMu in the past, discussing its attractive rates. However, it seems that in order to try to stem their problems, they had hiked their free checking and savings account APY to 4.00%(!) in order to gain customers. Of course, this was done in the past as a last ditch effort to look good, even as they were trying to right a sinking ship. There are folks out there who will take that rate and are willing to live with the risk of their bank undergoing changes. But Id be wary about developments like this, while the worst of any financial crisis continues to wind its way throughout the financial industry.

My take? If youve got money in WaMu that you dont need quick access to and is FDIC protected, Id keep my funds in place and see how things play out; otherwise, Id be moving some funds around right about now (to keep under the FDIC guidelines at the very least). If youre looking for potential alternatives, you may want to check out HSBC Advance or FNBO Direct .