During this time of financial uncertainty as giant powerful cornerstones of the American banking community fail, you have to wonder, is my money safe? What happens if my bank is no longer doing business? Should I take my money out? What about small, regional banks and even credit unions? Are they immune or will they suffer the same fate? Should I worry about my long-term investments? Is it finally time to get organized and figure out my finances?
For months now, the American financial backbone has been a sinking ship, headed toward a crisis beyond anyone's experience and description because not even the Great Depression can compare. Many say we have been in a recession but there have been signs of a Depression for a while. Even such financial leaders like Bear Stearns, IndyMac bank start to fail and powerhouses like Fannie Mae and Freddie Mac need federal assistance; there is something rotten here. This is not to mention the Lehman Brother's bankruptcy and the proposed bailout of $700 billion bailout, which was initiated by American Insurance Group or AIG. No wonder our heads are spinning; we don't know if we are coming or going. Everyday on the news it is something new. People are taking to Internet financial pages like MSN Money and sending emails to financial experts across the country for advice.
Oprah has Suze Orman on her show as a way to elevate the worry but still there are very few answers and still more questions. We can take a moment to answers the questions but you also must keep in mind, the answers are changing for from minute to minute.
How can I tell if my bank will fail? Well you really can't. There's no easy way to know and I'm certain the bank will try to ease your worries. You should look at indications within the market because there is no a hot list of banks going bad. The Federal Deposit Insurance Corp does not publish one. Furthermore, according to the American Bankers Association many banks rebound and recover so quickly that it's next to impossible for them to produce a list.
I wouldn't entirely trust rating services or systems either like those provided at Bankrate.com. Ratings try to pinpoint strengths and weaknesses of financial organizations but once again the relative time it takes to rebound causes these ratings to fall short. It is best to watch word from the street and possibly rumors of failure could tip you off. I believe much of keeping an account begins you're your banking relationship and how solid that remains in good times and bad. Still if it comes down to your bank was seized, read more below.
If my bank fails, will I still have access to my money? This is always a sore subject but our first worry in this situation. Something as simple as pumping gas or buying your morning coffee can be interrupted because your bank is changing hands. I mean more than likely if another will acquire your bank and this is not always a seamless transition.
Typically what will happen is that regulators will require the failed bank to shut its door on a Friday which can give the FDIC the complete weekend to make such changes to the banking system and network. For instance, recently Indy Bank transferred its insured deposits and assets to a newly created bank called IndyMac Federal Bank.
So if this should happen in this way, any bank account holders will be able to use their money per usual methods like ATM, debit card and check. Come Monday morning, it will be as if nothing happened.
Still these are uncertain times and there are no guarantees that the FDIC will find another bank to acquire the distressed bank or they can't get a new entity created, then your bank does shut down on Friday and you won't be able to use your money until this is resolved. Worst-case scenario is that the FDIC will send you a check for the amount in your accounts so you can open a new account at another bank. Nothing will work and it will be as if your account is closed or overdrawn. This is one reason why I always see it a good idea to have two accounts open at two different banks. I have one with a national giant and the other with a regional, local "small town" bank.
Is my account at my local credit union also insured like a bank account? If the credit union was chartered under federal law or state chartered credit union will be insured by the National Credit Union Share Insurance Fund. This fund basically fills the same role as the FDIC meaning that the credit unions are backed by the U.S. government. There is also the share-insurance fund that is a sector of the National Credit Union Administration, also an agency of the U.S. government. You will need to double check with your credit union to see which fund covers them. Much like banks, the credit union accounts are insured for the same levels of protection or $100,000 per account per credit union. There is an exception for certain retirement account as they can be insured up to $250,000. You must keep in mind, there are a few state-chartered credit unions not backed by the NCUSIF and these credit unions find backing for their insurance from private parties like American Share Insurance. Due to the nature of this structure, the federal government is involved and in my view this poses a risk.
How about my investments? Are they insured? Here is the sad truth and where most people will be hurting currently and in the years to come. Investment account even though opened with banks and other financial institutions, is not insured by the FDIC.
There is another entity involved called the Securities Investor Protection Corporation and the organization that backs investment accounts for only $500,000 per customer. This organization works to re-establish assets to investors with account holdings with failed banks or distressed brokerage firms. However it should be noted, this safeguard is restricted. This insurance unfortunately does not cover for a decline in the market like Wall Street, investment miss dealings and other losses typical of vesting nature. Also in order for this to work, this broker and their firm must have a membership to the SPIC. You should double check that it is current at the SPIC web site or phone them at 202-371-8300.
Should I bail out of the stock market? Well the stock market has always been a risk but if you don't feel comfortable with further risk-taking, I would say go ahead. Still if you have a lot of money and don't want to make more in the future, you should also exit. But if you are like most people, savvy with the market, you will want to stay in the game as you work closer to your sense of financial reward. There are stocks out there prime for the buying because they have dropped in price that will eventually pay off in a long term scenario. I mean when it comes right down to it, stocks are for the long run and not the short-term benefit of making a quick buck. It is just a matter of if you can have the patience to wait out the current storm.
I think a lot of panic has been caused by people realizing that their 401Ks have lost value over the last two weeks and typically this can happen but this is why so many advisors suggest diversified funds. Let's say your already in retirement, even then it's still a good idea to keep at least half of your assets in the stock market. Once again this keeps in mind the long-term benefit and insures your retirement does not run out.
Are money market funds still safe? This hits a nerve because as recently as last October, money market funds became a poor choice. The money market funds dipped below the share price of a dollar leading to a loss of funds for many clients. What this translates into really is the death of a firm or Lehman Brother's. The money market accounts due to this price change led to a loss of $785 million in short term commitments made by Lehman Brother's who later filed for bankruptcy protection, thus making many money market accounts valueless.
Why this really matters is because for many years money market accounts have been popular as safe havens for making extra money on investing wisely. It is unfortunate that time are so bad that mutual fund companies cannot even reinvest back into their own portfolio. This might have stopped the breaking of the buck or at least put some worries at ease.
If you have a money market find and it has cash that you'll need within the next year or two, I would suggest closing that account and moving the funds to a high-yield savings account with a FDIC insured bank. Still also keep in mind the threshold of the maximum insured for the bank is $100,000 per customer per bank.
I have an insurance policy with AIG. Am I still covered? Your policy is fine for right now because things are business as usual for AIG for the time being. What happened is that the company found itself in trouble over mortgage insurance. They sold a number of policies to people to protect against defaults on an assortment of assets and everyone knows what's been happening in the mortgage industry and the level of foreclosure. Everything is cyclical and as the mortgages started to default so did that area of holdings for AIG. It actually created a loss of $18 billion for the company.
What would happen if AIG goes under is that each state steps in with its own protection measures for policyholders. In short, each state will allow each policy some level of coverage. You must keep in mind that each state varies but most will allow for the following:
- $300,000 in life insurance death benefits.
- $100,000 in cash surrender or withdrawal value for life insurance.
- $100,000 in withdrawal and cash values for annuities.
- $100,000 in health insurance policy benefits.
As far as property insurance goes, there are guaranty funds that take over in situations where homeowners or auto insurers are broke but these pay offs have boundaries of $300,000 or less.
What about other insurers? Should I be concerned about them? I think it is wise like the banks to always keep a watchful eye out for any changes in status. You want the security of knowing that the company you have relationship with is strong and can follow through with its duties such as paying claims on time. You can also peruse the ratings of such companies on web sites for AM Best, Moody's and Standard & Poor's. You can also get a more interactive picture at Insure.com.
It is hard to say if you will have options if you want to change your insurance provider. It really depends upon the product. I mean it is possible to shift your annuity to another company by performing a 1035 maneuver without tax implications although there may be another fees involved. If you have a life insurance policy, this may be a sit and wait situation especially if you have poor health.
If there's a credit crisis, how come my credit card company just raised my limit? Well the credit card companies still have to make money! They possibly see you as a good risk at this time and want you to benefit from an increased credit line. Interesting that this is sort of a bait and switch because more than likely the credit card companies have lost money on customers who are defaulting so that pass that on to you, the responsible credit manager. This may also be the reason why those with high balances are seeing their limits cut and their rates skyrocketing while others with good credit continue to enjoy that prestige.
With that in mind, home loans may be the only exception right now where people must have prime credit rating and money in the bank in order to do a deal. Banks want to see equity built and responsible money management.
What's going to happen next? That is a loaded question because no one can predict the future and this who bailout thing changes from minute to minute. Things might get worse before anything gets better; only time will tell. I say pay it forward if you can do so. I think many have forgotten that although things seem bad for you're standing, someone else is hurting for worse. If anything maybe that can prove to be a tide of change toward good in the future.
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