With IndyMac being taken into conservatorship, a lot of folks have been researching FDIC insurance and how best to protect their assets. I know I was checking all the bank ratings and announcements, looking to see if I should be worried about my assets at banks like E*Trade, ING Direct, Emigrant Direct, and HSBC Direct.

Common sense tells me that my research was unnecessary because I don’t have assets above the FDIC $100,000 insurance limit. As long as you don’t, your assets are safe. If the FDIC insurance program ever failed to protect assets up to that limit, we’d have much bigger issues to deal with. However, I wanted to get a sense as to whether recommending any of those online banks was still a smart idea. I don’t want to tell my friends that HSBC Direct is great only to find out that it’s going into conservatorship tomorrow! They already make fun of me for having a “blog.”

Anyway, in doing my research, I saw a lot of false indicators of bank health. These are ideas I had in my own head, like checking Bankrate’s ratings, seeing how old the bank was, the stock price, and whether it had any brick and mortar locations I could visit.

Sadly, I realized that none of these indicators were strong assurances that a bank was safe. Let’s look at each of them.

Bank Age

Banks aren’t like people, they have turnover, their personality changes, and the company you knew 80 years ago isn’t the same one that operates today. In 1995, Nick Leeson brought down Barings Bank, the oldest merchant bank in London with origins back to 1762 (and the Queen’s personal bank and the financier of the Napoleonic Wars), through futures trading and fraud. It was absolutely stunning when it happened since it was all the work of one trader (you can see a depiction in Rogue Trader with Ewan McGregor).

Barings Bank RIP (1762-1995).

Brick & Mortar Locations

If you were aware of online banks when NetBank failured last year, you probably got a little spooked. I know I was spooked a little. When junk hit the fan, there wasn’t even anywhere for anyone to go!

Whether or not the bank has a physical location isn’t a good indicator of a bank’s health. There are several banks that are entirely online, or extremely limited physical presences, such as ING Direct, that are, by all other measures, perfectly safe. IndyMac has physical locations, as the latest news reports have shown, and that didn’t help at all.

Ratings

Bankrate has a Safe & Sound rating for banks and credit unions that is a good indicator of a bank’s soundness in most cases. A rating of 1 (Superior) is better than a 5 (Lowest Rated) but neither score is really a good indicator of whether a bank is going to fail. The problem is that failures can occur extremely quickly (”The second lesson of IndyMac is that it underlines the speed with which banks can go under once confidence in them is lost.”) and Bankrate, along with many other rating services, might not update fast enough to catch the changes.

Here is the disclaimer from Bankrate’s Safe & Sound site: “Events occurring after safe & sound CAEL ratings and reports were prepared and before they are updated as scheduled may have altered an institution’s financial condition. For example, the FDIC reports that approximately 280 banking institutions were impacted by Hurricane Katrina.”

Here’s a prime example of how you bank ratings may mislead you about bank safety. In Nickel’s post, Washington Mutual has the best rating despite all the news about its subprime exposure. He hits the nail on the head as to the reason… scores are only updated quarterly.

Sagging Stock Prices

IndyMac’s stock fell as it failed, much like the stock of any company going under. You might be tempted to think that a rapidly falling stock price is a good indicator of whether a bank will fail, just as how a rising stock price is a good indicator that I won’t. Sadly, the falling stock price is merely a trailing indicator because it lags what the market knows. The prime example is of all the banks and financial companies pulling money out of profits to protect against potential future subprime losses. Washington Mutual, National City, and M&T Bank all had big falls this week because of market fear though the banks themselves reiterate that they haven’t experienced any problems.

At the end of the day, your money is protected by the FDIC.

(Photo: zoliblog)

Nearly 1 year ago I wrote 50 Fun Facts about Credit Cards, a post that was very well received, so I figured why not follow that up one year later with another 50 fun facts post - this time talking about banks. I like reading about history so the first batch of facts revolve around the central bank, starting with the First Bank of the United States and ending with our current Federal Reserve system (you can see the progression!), then wash that meal down with some more entertaining facts like some other firsts, a few mind boggling statistics, and then some fun stuff like bank robberies and banking sponsorship information. It was fun (and educational) putting it together so I hope you enjoy reading the list. (much like last time, I added in a few bonus facts!)

Central Bank History

• The first chartered bank of the United States was the First Bank of the United States, formed in 1791 by The United States Congress.
• If you want to visit, it’s located at Third Street, between Chestnut & Walnut Streets in Philadelphia; but it’s not open to the public.
• The bank was the brainchild of then-Secretary of the Treasury Alexander Hamilton, who proposed that the bank sell $10M in stock to help establish its initial funding. Of the original $10M, $2M would be purchased by the United States. However, since the newly formed United States didn’t actually have $2M, the bank would loan the government $2M that the government would pay back in ten annual installments.
• The creation of the bank was lumped in with an increase in excise taxes on liquor and the minting of paper currency. In order to push the bill through opposition to the excise taxes from southern members of Congress, Hamilton brokered a deal to support a bill that would move the capital from Philadelphia to what later would become Washington, D.C.
• The First Bank of the United States was not the first chartered bank in the territory that is now the United States, that distinction belongs to the Bank of North America. That bank was chartered on the last day in 1781 by the Congress of the Confederation.
• The Bank of North America would be succeeded by the First Bank of the United States.
• The Bank of North America, with national bank charter #1, still exists today and is held by Wachovia, N.A. Wachovia still operates a branch at the northwest corner of 6th and Chestnut in Philly, the site of the original bank.
• As you may have expected, that Wachovia branch is the longest continuously operating branch bank in the US, having been there since 1781.
• The Second Bank of the United States was chartered 5 years after the charter for the First Bank of the United States expired and the Second Bank was again located in Philadephia.
• Why a Second bank if the government allowed the charter for the First Bank to expire? War! The US found itself unable to finance the War of 1812 and thus chartered a Second Bank of the United States.
• There was quite a bit of controversy around the bank, there’s plenty of resources out there to read about it if you’re interested so I’ll skip it here, but eventually it went bankruptcy five years after the expiration of its charter in 1836.
• If you want to visit, it’s located on Chestnut Street between 4th and 5th Streets and it’s open to the public free of charge( National Parks Service info page).
• There was no Third Bank of the United States, or any central bank, for 80 years following the expiration of the Second Bank’s charter. That’s when the Aldrich plan, named after Republican Senator Nelson W. Aldrich of Rhode Island, of fifteen regional central banks was floated and discussed.
• Eventually, the Federal Reserve Act of 1913 instituted 12 Federal Reserve banks, headed by a seven member Federal Reserve board plus a single US currency, a Federal Reserve Note.
• The twelve Federal Reserve banks are located in Boston (1), New York (2), Philadephia (3), Cleveland (4), Richmond (5), Atlanta (6), Chicago (7), St. Louis (8), Minneapolis (9), Kansas City (10), Dallas (11), and San Francisco (12).
• All nationally chartered banks are required to become members of the Federal Reserve System, which means they must buy non-transferable stock in their regional Federal Reserve bank.
• In the 1930’s, the Federal Reserve Act was amended to include the Federal Open Market Committee that consisted of the seven members of the Board of Governors of the Federal Reserve System and five representatives from the regional Federal Reserve banks.

Other Firsts (and Lasts)

• Flatbush National Bank of Brooklyn, New York was the first bank to issue a credit card in 1946.
• The first bank to be managed entirely by women? First Woman’s Bank of Tennessee, founded in 1919. Unfortunately, its founder, Brenda Vineyard Runyon, was unable to secure a successor after her health began to fail and it was eventually absorbed by First Trust and Savings Bank of Clarksville in 1926.
• Curious to see a list of all the defunct banks in the United States? Check out this page on Wikipedia, it’s accuracy isn’t known.
• As of this writing, the last bank to close was Miami Valley Bank in Lakeview, Ohio on 10/4/2007. It was closed by the Ohio Department of Commerce, Division of Financial Institutions.
• The one right before that was the much more publicized NetBank, shuttered only a few days earlier on 9/28/2007.
• The first bank Jesse James’ robbed was the Clay County Savings Association in the town of Liberty, it was the first armed robbery of a US bank after the Civil War.
• Barings Bank, founded in 1762 and helped finance the Louisiana Purchase, Napolean’s war effort, and other notable historic events; collapsed after Nick Leeson’s losses of £827 million in Singapore futures contract speculation. It was sold to ING for £1! Barings Bank had been the oldest merchant bank in the City of London. (This was the subject of Rogue Trader)

Stats and Figures (Some Mind-boggling)

• According to the Federal Reserve System’s National Information Center, the top five bank holding companies (in order) are Citigroup, Bank of America, JP Morgan Chase, Wachovia and Taunus (Deutsche Bank).
• As of 9/30/2007, the top five hold $6,775,079,249,000.00 in assets. That’s six trillion, seven hundred seventy-five billion, seventy-nine million, two hundred forty-nine thousand dollars of assets.
• Three of the top five are headquartered in New York City, NY (Citigroup, JPMorgan Chase & Taunus). Bank of America and Wachovia are headquartered in Charlotte, NC.
• In 2006, there were 1,279 savings institutions according to the FDIC. 435 were supervised by the FDIC, the balance were supervised by the Office of Thrift Supervision (OTS).
• In 2005, there were 7,527 FDIC-insured banks with 72,775 branches and 80,302 offices at year end.
• In 1934, there were 14,146 FDIC-insured banks (unknown number of branches) at year end.
• At the end of 2005, the total assets of all FDIC-insured banks was $10,090,355,277,000.00. That’s ten trillion, ninety billion, three hundred fifty-five million, two hundred seventy-seven thousand dollars.
• At the end of 1934, the total assets of all FDIC-insured banks was $46,437,000,000.00. That’s a mere forty-six billion, four hundred thirty-seven million dollars. Inflation adjusted according to the Bureau of Labor and Statistics and you’re talking about $676,801,950,000.00 in 2005 dollars.

Consumer Protection

• If your bank has FDIC insurance, your deposits are protected up to $100,000.
• To check if your bank is FDIC insured, use the FDIC’s Bank Find tool. Just because they say they are insured doesn’t mean they are.
• Credit unions deposits are protected under the National Credit Union Administration.
• To check if your credit union is NCUA insured, use the NCUA Find A Credit Union tool.
• The insurance coverage increases to $250,000 if the account is a retirement account.
• There are over a dozen Fed Regulations and laws that protect consumers, a page on the Chicago Fed website has a list of all of them. You will notice a few popular ones such as the Fair Credit Reporting Act and Regulation CC (how long a bank can hold your check funds as they process). It may make for some dry reading but it’s useful information to know.
• I wanted to specifically call out Regulation AA, Unfair or Deceptive Acts or Practices, which governs the procedures a consumer should follow to report unfair or deceptive acts or practices performed by a bank with respect to the extension of credit. This is especially appropriate nowadays but the regulation spells out specifically what you should do.

Actually Fun / Interesting Facts

• Bank of America has merged/acquired plenty of other banks, the most prominent of which was the Bank of Italy. In fact, when Bank of Italy merged with Bank of America, it was the Bank of Italy’s founder that served as its head. So you could say that Bank of America could’ve just as easily been Bank of Italy!
• The largest cash robbery, about $18.9 million) to have taken place in the United States was called the Dunbar Armored robbery, which took place at the Dunbar Armored facility in Los Angeles, CA. While everyone was caught, about $10M of the stolen loot was lost. It was an inside job and no bank was involved but it’s still worth mentioning, don’t you think?
• The largest cash robbery of a bank was the Loomis Fargo bank robbery in 1997, in which $17.3 million was stolen from a regional office vault in Charlotte, NC. Again, another inside job and the thieves were caught (so was 95% of the cash).
• Moments before the US started bombing Baghdad, nearly $1 billion dollars was stolen from the Central Bank of Iraq and considered the largest heist in history. $650 million was later recovered in the walls of one of Saddam’s palaces but the balance is still missing.
• The N.A. after the name of a bank indicates it’s a national bank, it stands for “National Association.” It means that the bank is chartered by the Office of the Comptroller of the Currency.
• The FSB after the name of a bank indicates that it is a Federal Savings Bank or a Federal Savings Association. It differs from a bank in that it’s overseen by the OTS and takes deposits for the purposes of lending it out for residential mortgages.
• Savings and loans are slightly different, they’re like FSBs/Thrift banks but for all types of mortgages, not just residential ones. The distinction is very slight and the lines are blurring among the three types.
• The North Hollywood shootout occurred after the pair of heavily armed thieves robbed a branch of Bank of America.
• The Riegle-Neal Interstate Banking and Branching Efficiency Act, passed in 1994, has a provision that states no bank may hold more than 10% of the all deposits in the United States. The bill also made it possible for banks to buy other banks headquartered in other states, this was previously illegal.
• Bank of America is the official sponsor of the United States Olympic Teams, the National Football League, the National Hockey League, NASCAR (National Association for Stock Car Auto Racing), Major League Baseball, Minor League Baseball, and even Little League Baseball!
• In the NFL, there are currently five stadiums sponsored by financial institutions. M&T Bank (Baltimore Ravens), Invesco (Denver Broncos), Lincoln Financial (Philadelphia Eagles), Bank of America (Carolina Panthers), and Raymond James (Tampa Bay Buccaneers).
• In the NBA, there are currently five six arenas sponsored by financial institutions. TD Banknorth (Boston Celtics), Conseco (Indiana Pacers), TD Waterhouse (Orlando Magic), Quicken Loans (Cleveland Cavaliers), Key Bank (Seattle Supersonics), and Wachovia (Philadelphia 76ers).
• In the MLB, there are currently five stadiums sponsored by financial institutions. Chase (Arizona Diamondbacks), Comerica (Detroit Tigers), Citizens Bank (Philadelphia Phillies), PNC (Pittsburgh Pirates), and Safeco (Seattle Mariners).
• In the NHL, there are currently eight arenas sponsored by financial institutions. Wachovia (Philadelphia Flyers), Mellon (Pittsburgh Penguins), TD Banknorth (Boston Bruins), HSBC (Buffalo Sabres), Scotiabank (Ottawa Senators), BankAtlantic (Florida Panthers), Scottrade (St. Louis Blues), and Pengrowth (Calgary Flames) RBC (Carolina Hurricanes).
• Blueprint for Financial Prosperity is not sponsored by any bank, but would certainly entertain offers!

5.05% APY is a pretty healthy yield and one of the highest in the nation now that the Fed has been pulling interested rates down (much to the chagrin of overseas travelers and those shorting gold) so last week I opened up an E*Trade Complete Savings account yielding exactly that. To open an account, just go to this application page and submit your information. Now, here are a few tips after you open the account as I found the start-up and activation process to be a little confusing (it was the first time I called up the help services of any bank to assist me with opening an account, if that’s any indication).

Incidentally, E*Trade Bank is FDIC insured and has been since June 23, 1955; much longer than I had thought they’d been.

Online Access

After you create the account, you can log into E*Trade but the account won’t immediately appear. At first I chalked it up to the account not being established yet; but after I received all the account documentation in the mail and didn’t see the Complete Savings account listed in my Accounts Complete View, I was surprised. Apparently what you need to do is click on the “Banking & Credit Cards” tab located at the top of your screen and then look for an “Apply for access” link. I thought I already applied! Anyway, there will be three boxes that appear for you to enter in your social security number, your account number, and your zip code. After that, you new account will appear. I’m not sure why this is necessary or why none of the introductory material had a “Get Started” section to explain this. Another way to reach this is to find the link that says “Don’t see one of your accounts?,” that’ll bring you to the same page.

Adding External Accounts

When you first open your account you need to add an external funding account, I added my Bank of America account since everything funnels through there. Well, the initial $100 was withdrawn but I can’t immediately transfer money yet - I have to verify it! To do that, look for the “External Account Added” in the “Alerts” section to the right of your screen, click that and then click on “Verify your external account now” in the window that pops up. That will take you to a page that details the external account, click on the Verify link next to the “Verified on:” text label. (There are about a million ways to get to the verification page, so don’t fret).

Now there are two ways to verify an account, username and login or two small deposits. I’m willing to wait and go the two deposits route even though they claim that “Your external account login information is maintained within a secured session and will not be stored to perform this verification.” That’s okay, waiting 2-3 business days for two small deposits is acceptable.

What I don’t understand is why I need to verify an account that already has been debited in the first place. My Bank of America account was used to fund this account so why would I need to verify it one more time? The only time this makes sense is if I were to open up a bank account in someone else’s name (knowing all their information), gave it an initial deposit, but didn’t want that person to have access to my bank. Is that scenario common? I wouldn’t think so. I am pretty sure every other bank I’ve worked with has automatically added the initial funding link without having to go through this process.

Fast Help Desk

I did have to call 1-800-ETRADE-1 (1-800-387-2331) to find this and it took me about two minutes to reach a representative (it was also 8AM this morning), very quick considering I didn’t feverishly hit “0″ in an attempt to reach a representative ASAP. They were very helpful and we resolved this issue, probably something they hear all the time, in about a minute. Unfortunately, I have no basis for comparison because I’ve never had to call ING Direct or Emigrant Direct for anything.

E-Trade Financial took a huge hit to their stock price today (50% haircut!) on word that they will be taking huge write downs because of their investment in securities backed by home loans. In fact, a Citi Investment Research analyst covering E-Trade downgraded it to a “Sell” from a “Hold,” adding that there’s a 15% chance E-Trade would go bankrupt. So what happens and what can you do if your brokerage goes bankrupt?

First off, you only have any protection if your brokerage has SIPC insurance. SIPC stands for U.S. Securities Investor Protection Corporation and it’s a federally chartered private corporation insuring shareholders against a stock-broker going bankrupt. It’s similar (but not exactly like) to FDIC and NCUA insurance for deposit accounts but covers against bankruptcy and not issues like fraud. If your brokerage is a member of the National Association of Security Dealers (NASD) FINRA (Financial Industry Regulatory Authority), then you will have SIPC insurance because the FINRA requires it. I personally would never use a brokerage that wasn’t in the FINRA because there’s simply no reason for it. The SIPC will cover you for $100,000 cash and $500,000 total (stocks and bonds, not futures, options, currency, etc.) but the brokerage itself may have supplemental insurance that goes beyond that.

So, what do you do? If your brokerage is liquidated, the court-appointed trustee will send you a claim form to fill out and send back. The turn around time is estimated at one to three months according to the SIPC website and that’s if you qualify (most do, there are some exceptions on that) and do it within the deadlines. Lastly, make sure you have good records with your statements so you can get your stuff back in a timely fashion. It’s not unheard of for a brokerage to have bad records so having your own helps the process.

Now with ETrade specifically, they claim to have SIPC coverage and you can confirm this by searching for “E*TRADE Securities LLC” in the SIPC lookup database. The search is very fickle, you have to type the whole name or it won’t find it (Etrade, Etrade financial, etc. all give no result).

Unless I’m missing something, it sounds like those folks who have investments through ETrade are covered by the SIPC. Those investing in ETrade are a different matter… whew, 50% is hard to take.