Saturday, August 16, 2008

Investor Vs. Depositor

I've been meaning to compose this post for a few months now in attempts to answer a some questions which I have been frequently asked this year by friends, family and many people I am in contact with through my job. For the past three years I have worked for a large national bank--one that I really like. You could say it's sort of a family thing; my oldest sister has worked for the same bank for a decade and my brother-in-law has also been affiliated with the company for several years. It's been a great experience for us all . . . until lately:) I say "until lately" because it has been due to recent turns in the economy, many of which are the result of terrible decisions made by the very companies (banks) that are now suffering, that have made work sort of a different experience this year. Because of all the hype and constant rumors, some perpetuated by the media which we've all sort of given more credence to than our own individual investigations and common sense, there has been an overboard panic and paranoia which is not entirely rational or justified. I am in no way a banking expert but I do know a thing or two and I hope to answer some of the most frequently asked questions today that I have been answering day-in day-out for months now.

Many of you are probably not fully aware of the paranoia I'm talking about. Those of us who are inside banks every day get front row seats to some of the madness as dozens of people (mainly the elderly for very justified and understandable reasons) storm the teller lines to quickly withdraw all of their funds "because I've seen the stock market today and you're going to fail any minute!!!" Please let me explain why this is COMPLETELY irrational:

1. Does a dip in the stock of a bank indicate risk for its customers?

Well, about as much risk as getting hit by lightening by going outside. Everything we do in life has some associated risk; depositing money in an FDIC insured banking institution brings no extra risk to anyone's financial security regardless of stock prices. Some of you just screamed "well why did the banks fail when the stock market dropped in the Great Depression?!" Well the government has imposed strict insurance regulations since that event in order to prevent a similar situation. As long as your money is FDIC insured, it does not matter how far a stock drops; you are just as safe with your money there as you are anywhere else. YOU ARE NOT AN INVESTOR; YOU ARE A DEPOSITOR. SO STOP WORRYING ABOUT THE STOCK. This is a simple principle that needs understanding. When someone pulls their money out of a bank because of a drop in stock price, the only thing it does is make the stock more shaky; it does not secure their money any more than if they had just left it in posession of the bank.

2. How much of my money can be FDIC insured and how do I know if mine is?

FDIC insurance has many rules that can seem a bit complicated but very simply put, typically each individual may have up to $100,000 FDIC insured at each banking institution with which they have a relationship. So if Suzy Q and Luke Skywalker have one joint money market account at Gringott's, they could have up to $200,000 in that account and still be completely insured. If they added their three children to the account who don't have any further relationship with Gringott's, their money would be insured up to $500,000 (100k per individual). You can find out if your money is FDIC insured by simply asking your bank. FDIC stickers are also placed all over branches.

3. But I don't want my money to be in a bank that fails regardless of insurance. I don't know how long it takes for the government to give me my money.

The United States government has no interest in doing anything that is going to create any more panic than already occurs when a bank falls. When the California based Indy Mac bank fell a month or two ago, the fed seized the bank on a Friday evening, worked furiously over the weekend, and opened the doors of the branches on Monday morning running business as usual. This was done with the intention of the FDIC running the operations of the bank until its assets were dealt with and the deposits were adopted by other banking institutions. The transition is smooth and relatively risk-free. I say "relatively" because of our next question:

4. Well, either way, wouldn't I be safer to just keep my money in cash under my mattress?

No. And slap yourself on the side of the head for asking that without thinking through it. The only reason you would want to keep all of your money in cash is because you don't believe the government is stable enough to insure your money when a bank fails. Well, if you don't think the government will last, I hope you don't think your dollar will be worth anything whether it's in the bank or in your pocket. I've also had some people recently decide to move their money despite the FDIC insurance because they didn't believe the government was going to make it, so they were putting funds into another bank whose stock seemed more stable. Well I don't know what bank you think will out-survive the government AND still make your dollar worth something but I think you're over-thinking it. I do think it's a great idea to keep some cash at home for emergency situations--especially local emergencies when banks may become temporarily inaccessible, but there is no sense in keeping your entire life savings under your mattress.

5. Should I just invest in gold? Gold will always be stable.

My personal opinion on this is that if you really want to "invest" then find something that will actually make you money; like a mutual fund. If you're buying gold just to keep your money secure, well the principle of the worth of gold is the same as the worth of the dollar: there is no intrinsic value in gold. The only think that will always have consistent value to mankind is food and shelter. Seems senseless to me to buy gold to secure or grow your money; but there are much worse things you could do.

In conclusion, I don't really believe we are going to see massive failings of national banks but rather, at worst we'll probably see a few more mergers and lay-offs but nothing that will affect a depositor's money as long as they have taken the necessary precautions. I'm a bit of an optimist but I think I'm also a realist. I'm a banker who is leaving his money alone and taking advantage of some of the great promotional interest rates in savings, money markets, and CD accounts that banks are advertising to try to retain some of the deposits that help the banks continue to function. If you have any other questions feel free to ask in the comments and I'll try to either answer or find the answer. Again, I'm no expert but I hope some of this info has been useful!


  1. I'm totally with you on this one, Eli. The government really, really, really doesn't want the Great Depression to happen again, and we've had eighty years to think of how to stop it.

  2. Eli,

    I am so glad someone wrote about this. People need to calm down leave their money alone and realize that the stock is just on sale! The reason Indy Mac had to be seized was because some guy from Wall Street came out in the media and said that Indy Mac was going down. People freaked out and ran and took all their money out causing the bank to fall below the minimum amount of reserves the bank is required to have on hand by the FDIC. So...the gov seized them. If people would just stop listening to the media and do banking as normal things would be a lot better!

    Also...for anyone interested, the FDIC has a website with a calculator to help determine hopw much is FDIC insured and how you can split your money up into different types of accounts to maximize your coverage. The calculator is called EDIE. (it's pretty interesting. I did an example where a husband, wife and 2 kids were insured up to 1.3 million at one bank!! and that was without the kids even opening their own accounts.)

    Anyway, I hope this info will help people understand banking better.

  3. eli. that was very informative and reassuring - although i was never in a panic... but nice to know anyway since i bank at the bank you work for... and i think you need to publish this in pamphlet form. i felt like i was reading a pamphlet. your pamphlet will also need some pictures. i'm just sayin.

  4. Well.........half of what I read was way over my head......."dedaleee"! No, I actually understood most of it. I trust whatever you and Krishelle say, so I'll just listen to you two when it comes to my millions of dollars I have at your bank!

  5. I am really glad you wrote this. It was very informative and though, I was never concerned, (I have no money so what's there to lose?) It's nice to have your perspective. I am going to go out and invest in lots of food and shelter so I have something when the dollar is worthless. :)