Scary Times

I'm not sure where to begin. There is so much that I have to say that has been bottled up. As you know, I have not posted a blog in almost two weeks and I apologize for that. Between vacation and returning to a ridiculously busy schedule, I have not had the time to put my thoughts on paper.

These are scary times. You know me, I am the eternal optimist and I like to highlight the glass is half full story but the past couple of weeks have called into question the health not so much about the U.S. economy as much as the health of the financial and credit markets. The news that IndyMac failed and that Fannie Mae and Freddie Mac needed a rescue package to sure up their liquidity has sent ripple effects through the stock market and to the consumer. You and I read the headlines about bank failures and we wonder whether our money is safe. Rightly so! This morning I appeared on Good Morning America again to talk about how to protect your assets. I want to reiterate some of what I said and then follow this blog up with the bigger philosophical conundrum that we find ourselves in.  

If you have money deposited in a checking or savings account with a commercial bank or financial institution, make sure that they are FDIC insured. The FDIC insured banks guarantee $100,000 dollars of protection for individual accounts and $250,000 dollars for retirement accounts like 401k’s or IRA’s. Some investments like investments in stocks, mutual funds, bonds, life insurance policies and annuities are not covered even if purchased from an insured bank. The best thing you can do is go to the FDIC’s website to see if you are covered at www.FDIC.gov/.

Many of you have read or heard in the past couple of days about people who lost a lot of money that they had in savings at IndyMac. Up to $100,000 dollars was covered. Above that many depositors will receive 50c on the $1. So if you had $200,000 invested you lost $50,000. That’s very difficult to stomach and something you would never expect from a bank. So what can you do about it? DIVERSIFY, DIVERSIFY, DIVERSIFY! If you have over $100,000 in cash or deposits, spread it among a few financial institutions. Also make sure those financial institutions are insured as I said above and that they are brand names, well established banks. Don’t keep your money with a small bank that focuses entirely on sub-prime loans or construction loans. Do your homework. Bigger isn’t always better in terms of saving rate options and CD rates but bigger can protect you in the long run.

If you’re concerned about your investments at a Broker Dealer, don’t worry. They too have insurance. It’s called SIPC and it covers you for up to $500,000 dollars of which $100,000 is the maximum coverage in cash. You can go to SIPC’s website at www.SIPC.com to see which Broker Dealers are covered. In addition, 15 very well known Broker Dealers, like Goldman Sachs, Morgan Stanley and Lehman Brothers, purchase insurance from a company called CAPCO. CAPCO Insurance, otherwise known as excess SIPC, covers investments above the $500,000 SIPC coverage although not all investments are protected. Do your homework. Here too, you can diversify your investments and assets among several different broker dealers to protect those assets if your broker dealer isn’t on the CAPCO list.

Finally, I do want you to note that the FDIC had 90 banks on its watch list at the end of the 1st quarter. IndyMac was not on the list. In the period between 1982 and 1992 2,808 banks failed. Last year 3 banks failed and five banks have failed this year. Some economists and analysts are predicting that 100-150 banks may fail in the next year or two. Yes, that is frightening and you don’t want to be with one of those banks but the FDIC will not warn you or release the watch list. In addition you have to put this in context, there are 8,500 insured banks in this country. If more fail, it is a small fraction of the banks that failed during the S and L crisis (Savings and Loan).

If there is something to worry about it is that the FDIC has the funds to recoup or repay all of the deposits. Today there are a lot more uninsured deposits than there was two decades ago. In addition, the health of FNM and FRE to the overall credit markets is crucial not only for the mortgage markets but for the U.S. dollar and treasury markets. The Government will not let them fail. Be assured. The risks are too vast and the overseas investment in the GSE’s (FNM and FRE), is too big to allow them to fail.

As I speak Fed Chairman Bernanke is testifying on the Hill. He is between a rock and a hard place. Bernanke, along with Treasury Secretary Paulson, have to orchestrate what appears to be unchartered waters and create some sense of security in our financial markets. This story will not end today. Watching Bernanke I can’t help but notice that he looks exasperated. The market is reacting well enough as oil is getting hit hard on further OPEC comments about declining demand. Bernanke is echoing that sentiment. More to follow.