Financial "Crisis": Is Your Money Safe?

As you've probably noticed, Wall Street is throwing up its hands and yelling, "FIRE!!!!!!!!!!!!!!!!" The bailout plan didn't pass in Congress and the Dow Jones fell almost 778 points, a new record. It all sounds pretty apocalyptic, but as a recent grad, do you have anything to worry about?

In most cases, no. And if you do, it probably means you're doing something right. Let me explain.

What Happened?

The events that brought the markets crashing down over the past few days were a combination of bankruptcies (e.g., the storied Lehman Brothers), government acquisitions of failing mortgage houses and insurers (e.g., Fannie Mae, Freddie Mac, AIG), the failure of Merrill Lynch (sure, they're not bankrupt, but they needed to be acquired by Bank of America to survive so I'd say that's failure), and the concerns over possible failures of Morgan Stanley and Goldman Sachs. And this is all in the face of government bailouts, which aren't yet making a positive impact (but who knows where we'd be without them).

To further compound these headlines, people have begun to lose faith in the major financial players (e.g., Morgan Stanley), so many are taking their money out of the stock market and bank accounts and placing it into government fixed income products, thus driving down the markets further and making it harder for vulnerable banks to avoid failure.

In other words, it's a vicious cycle.

Can I Lose My Money?

The simple answer is if you have a total of $100,000 or less at each bank where you hold an account, you're all good. If you have more, the amount in excess of $100,000 is at risk if the bank fails.

Here's how it works: the FDIC insures the cash you have at each bank up to $100,000. So, if you had a total of $98,234 between a savings and checking account at Bank of America, you'd still get that $98,234 back from the FDIC even if Bank of America failed. On the other hand, if you had $145,500 and the bank failed, you'd get $100,000 back and lose the additional $45,500.

To be clear, it's the total cash at each bank that matters. So if you opened two different accounts at Bank of America, and each had $100,000 in it, you'd still only get back a total of $100,000 and lose the other $100,000 in the event of a failure. On the other hand, if you had $100,000 at Bank of America and $100,000 in Citibank, and both failed (and the world ended), you'd get back the $100,000 from Bank of America and the other $100,000 from Citibank.

Note: All of this only holds if your bank is FDIC-insured. Make sure it is before assuming you're covered.

And If I Have More than $100,000?

So you're a young Daddy Warbucks and have more than $100,000 of cash at any one bank? Mo' money, mo' problems (but well done). If you're the type who believes that more banks could fail (and there are certainly many savvy investment bankers on your side), then why not let the FDIC get your back? Here's how: open new accounts at a few different banks and make sure you put no more than $100,000 of cash in each (no matter how many accounts you have at each bank). This way, each of those $100,000 chunks will be safe. Then, when you friend tells you how he had to open up two banks accounts to shelter his money, hit him right back and let him know that you had to open five. Who's richer now, sucka!?!?!?

This may have sounded more reactionary last week, but look at what happened to WaMu and Wachovia.

Another option is to move any cash in excess of $100,000 that you can't shelter in FDIC-insured bank accounts into government t-bills (30-day, 3-month, 6-month, etc.). Other people are suggesting money market accounts that invest in government securities/paper. And yet more are suggesting CDs that are issued by different banks. (Keep in mind, however, that the FDIC views CDs as cash. If you have $100,000 in cash and $50,000 in CDs at one bank, you only get back $100,000 and still lose the extra $50,000 if the bank kicks the bucket.) There are also some funky things you can do with bank accounts under different owners even at the same bank (e.g., joint accounts, trusts, etc.), but we'll let the FDIC inform you on this (note that these options might not even make sense for you, but it's always helpful to know what's out there).

Now we recognize that most of you probably won't have to worry because you don't have a baller-sized bank account yet. But maybe your parents do. This is an awesome time to flex your real-world muscles and help out the 'rents (if they need it).

And of course, we should note that some people may think this strategy of moving your money around is overly reactionary, and that's for you and your financial adviser to judge. But we think it's better to be safe than sorry. Worse comes to worst, things calm down in six months and you consolidate your money back into a single account, having lost only a negligible amount of interest. A small price to pay for peace of mind.

These Sound like Some Smart Moves. So What's the Catch?

We can't stress enough that investing in government backed securities or storing your money at FDIC-insured accounts are almost riskless, there are always unexpected issues that could occur (e.g., the FDIC goes bankrupt from so many banks failing). But if that was the case, you'd have a lot bigger issues than you cash. Nonetheless, before doing anything, please speak to your financial adviser or pop into your bank and speak to a banker to ensure that you understand your options and the pros and cons of each. In addition, The Wall Street Journal published a great article discussing way to secure your cash today.

If You're Wondering About SIPIC and Brokerage Firms...

The other wrinkle to throw in here is any investment plan you may have with a brokerage account. As FDIC is to banks, SIPIC is to brokerage firms (how's that for a little SAT-style education). The SIPIC insures up to $500,000 of your cash at a brokerage firm. However, what most people don't understand is that this insurance isn't meant to cover the failing of a brokerage firm, it's to cover theft or fraud (e.g., a rogue trader). In fact, if a brokerage firm fails that manages your money, you get all of your investments back (a brokerage firm should never put your investments on their balance sheets; if they do, move your money, but of course talk to a financial adviser first).

Whoa, This Is Overwhelming. What Should I Do?

Take a step back and a deep breath in. Then make sure your cash is insured by the FDIC, or if you have too much in any one place, move it around. Talk to your banker or financial adviser and figure out how to protect the rest. And finally, just be thankful that you don't have money in the Russian markets. After falling over 20% earlier this week, Padre Putin halted all trading activity. You wouldn't be able to take any of your money out. Huzzah for the good old red, ,and blue.

PS: While your cash may be safe, the economy 'aint. The failing of banks can drag everything else down with it. But that's another whole discussion. If you have a job or an opportunity to grab one, do so now. Or go back to school until things settle down!