Bank Musical Chairs, and a recommendation (updated 8/1/08)

I'm sure we've all played musical chairs, wherein a group of people walk around a line of chairs while the music plays. When the music stops, each person sits down on the nearest chair. The trick is there is one less chair than the number of people. That last person, the chairless one, is now out of the game.

I don't know what kind of a coma I was in Friday night, but I didn't hear the news of two more banks failing until Saturday. As I was watching C-Span, someone asked Senator Dodd a question about the "two banks that failed Friday night". I sat bolt upright, and flew into my home office to check it out!

Since the FDIC does not publish their so-called "Troubled Bank List" (which has grown to 90 so far this year), customers do not find out if their bank is in trouble until it has actually failed (meaning federal regulators have seized their assets & closed the bank). A quick check of the FDIC.gov confirmed the worst of my suspicions ... I have money in one of the failed banks!

There was a bit of panic (I was literally shaking) as I read through my options. Turns out for me, it's not too bad because: 1) these failed banks were sold to Mutual of Omaha Bank (they got into the banking business in 2007), and 2) my deposit does not exceed FDIC limits. But the specter of suddenly losing my own money, money that I put in a bank because I did not want or could not afford to risk it in the stock market or other investments, could have been disastrous! None of these entities are publically traded, so most depositors would not have known what was afoot beforehand.

Even though FDIC will not publish their "Troubled Bank List", they do list websites of private companies that rate safety and soundness of banking institutions. I STRONGLY recommend that you look at your bank's rating IMMEDIATELY! If I had been keeping closer track of my banks, I would not now be scrambling to make phone calls Monday morning attempting to waive withdrawal penalties so I can transfer MY OWN money into another bank. Don't forget to verify all your banks, even trustees of your retirement accounts (like IRA's).

The bank rating site I found easiest to use is Bankrate.com. They rate banks from 1 to 5 stars. A 3-star rating is "satisfactory". If your bank falls below 3-stars, it is in trouble. You can easily check your bank by name or state or zipcode. If you are looking for a good bank, you can select 4-star or 5-star rated banks in your state. I had gotten lax in looking up this critical information for banks I do business with, thinking a twice yearly check was good enough. WRONG! I will now be checking weekly! I recall that First National Bank of Nevada had fallen to 2-stars in June. I thought that was just a reflection of the poor Nevada economy. It did not occur to me that the bank was in trouble. As of today, it is rated 1-star (failed).

So .... yes, Mutual of Omaha Bank will assume the $3 billion in deposits of First National Bank (of Nevada, Las Vegas and Reno, and of Arizona, Phoenix and Scottsdale) and its affiliate, First Heritage Bank of Newport Beach CA. Characterized as "critically undercapitalized", these two banks had total assets of $3.5billion, but only about $3billion in deposits. Putting these two banks into federal receivership is costing $862million of the FDIC insurance fund. Mutual of Omaha will profit by this deal because: 1) they can now expand into NV, AZ & CA, 2) their bank will be greatly increased in size since they only had $750million in assets prior to this deal, and 3) the FDIC made them an offer they couldn't refuse (namely, some of the $862million the FDIC says this deal is costing will result in Mutual of Omaha having received assets for less than than they were listed on the day before federal regulators stepped in).

By contrast, the failure of IndyMac earlier this month is expected to deplete the FDIC insurance fund by $4billion to $8billion. The FDIC reserve is currently estimated to be $53Billion for apprx 8500 FDIC-insured institutions. Does anyone else smell a rat if there are too many more bank failures? How quickly can that $53billion be used up? What will happen to the first bank that fails after the fund is depleted? I'm picturing the banks slowly circling those musical chairs, shuffling zombie-like as the music drones on. Which bank will fail to find a chair after the music stops? What will happen to deposits of customers of that bank? This is why I say you should move your money if your bank falls below a 3-star bank rating!

And a final observation: these latest two failings make a total of seven FDIC-insured banks having been shut down so far this year. It's becoming somewhat of a Bush family tradition. There haven't been this many bank failures since Bush's dad was in office. Remember all the S&L's that collapsed from fraud and money laundering during Bush 41? I'm sure John McCain & Charles Keating (Lincoln S&L) remember them well. And don't forget the Silverado S&L collapse, starring George's brother, Neil Bush. It's kind of in their blood ... and once they smell blood, these guys usually go for the jugular.

**********Update 8/01/08: Another Friday ... another failed bank. This time it is First Priority Bank of Florida, closed by federal regulators late Friday so customers can spend the weekend worrying. FDIC agreed to let SunTrust Bank of Georgia assume the FDIC-insured deposits. But there is a twist this time for deposits which exceeded FDIC limits. FDIC will pay 50% of the uninsured amounts directly to depositors. This is getting scary.

**********Update 8/02/08: FDIC has just released a list of banks that they issued "final order enforcement actions" to in June. These orders are generally given prior to a "cease and desist". You should inspect this list closely. If your bank is one of these 28 banks, you may want to consider changing banks. It is the first hint of which banks might be on the infamous "Troubled Bank List" (rumored to number 90 banks) that the FDIC has said they will never publish.