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The Failure of the FDIC in the Wake of IndyMac: What Can Be Done to Protect Small Businesses in California and the Nation

By Fran Quittel
Frances Quittel, Inc.
www.FDICbusinessalert.com

I am a small California business owner and one of IndyMac’s 10,000 depositors who was hurt by the FDIC’s takeover of IndyMac Bank on July 11. That is no small number.

At the time of the FDIC takeover, my business had two verifiable liabilities which apparently temporarily put me over the aggregated $100,000 FDIC insurance limit, a limit which was obliquely left unclear until the FDIC decided to become my sudden partner. Linked to a payroll service, my business checking account, well under the $100,000 limit, held a liability for an uncashed payroll check which was verified to have been run by an outside payroll service on June 30. My business savings account, also under the $100,000 limit, stored some temporary funds set aside for a verifiable retirement funding, pending the completion of a tax return, so that the amount calculated was absolutely correct. (Incidentally, the completed return was mailed to me on July 14.)

But apparently the fact that my business operating accounts had these verifiable liabilities was meaningless to the FDIC, whose idea of how to “protect” me was simply to fail to tell me I was out of compliance and then strip me of the temporary excess cash by 50%. No notice required.

With no obligation to inform on the part of the Bank or the FDIC even 24 hours beforehand that I needed to either restructure my accounts or simply place those funds elsewhere so that they remained intact and available for their planned purpose, FDIC’s Chairman Sheila Bair, co-incidentally the author of a 2006 children’s book called ‘Rock, Brock and the Savings Shock,’ simply relieved me of 50% of the cash overage in my aggregated accounts, leaving me stranded on a Friday, at 5 pm, in utter limbo over an entire weekend, with no opportunity to correct the peril into which I was suddenly thrown. Ironically, the quarterly statements for my business money market account with a closing date of June 30 were postmarked July 9.

On Sunday, July 13, a ray of hope appeared with FDIC’s media director, Andrew Gray’s news release under Sheila Bair’s name, containing the following paragraph:

“All bank depositors should also understand that they can have insurance coverage in excess of the basic limits of $100,000 per institution, with an additional $250,000 per institution for IRAs. For instance, subject to certain conditions, single and joint accounts are separately insured, and revocable trusts generally provide $100,000 of coverage per beneficiary. If you have any questions about whether your deposits are insured, we encourage you to consult with your bank or contact our deposit insurance specialists at 1-877-ASK-FDIC. If you find that you are not fully insured, it may be possible to restructure your accounts to bring your deposits below the insured limits. But first get the facts before making any changes in your accounts or banking relationships.” [Italics and emphasis added. The full release is available here.]

But this was not to be.

Were I the only small business person in California whose funds had been reduced without warning by the FDIC, the conclusion might be different. But the unfortunate picture that appears here is that the FDIC is actually aggressively “anti-depositor,” providing muddled information and no warning, causing harm to depositors whose stated mission it is to protect. After all, when a major organization simultaneously acknowledges that 10,000 depositors were not insured, that 37% of its domestic accounts have overages, and that it has taken no remedial action at the simplest levels, this is a sorry picture indeed,.

In point of fact, IndyMac’s policy did not provide electronic access to its business customers, and only mailed its CD/money market statements on a quarterly basis, which the FDIC had to know. Therefore, although my business checking account statement was sent monthly, the last quarterly statement for my business money market was postmarked after July 9 (I still have the envelope), and received after the FDIC takeover, so I never saw both account statements at the same time, or knew the exact overage in my accounts, that is, until after the FDIC takeover.

With the FDIC failing to impose any requirement on its member bank to inform or provide notice that a problem existed, and then itself, at a moment’s notice stripping away 50% of a business depositor’s “excess” funds on an arbitrary date and time, disallowing verifiable operating liabilities, hardly seems fair at all. Furthermore, even in its press release of July 24, 2008, one day before the FDIC would announce two additional bank closings and while it was ostensibly moving toward improved depositor advocacy, its “list of depositor rights” still omitted what depositors need most: assurance that depositors will have up-to-the-minute access to their latest account information, and the right of depositors to receive an alert from FDIC insured institutions, even one included on a regular statement, if their accounts were “over”.

Here, then, are at least three simple actions that the FDIC could readily undertake to deal fairly and transparently with depositors, and particularly small business depositors whose operating accounts fluctuate so that small business is not penalized when the FDIC is about to lower the boom. The FDIC as the most basic part of its mission needs to make sure that their member institutions provide timely information, and not penalize depositors who have not been kept informed, and have established and pending, legitimate, small business liabilities which should be allowed to clear from operating assets that are shown to be encumbered against those :

1. For the FDIC to immediately implement “Mileage Account/Credit Card” statement type procedures for its member banks and their depositor statements and to establish a policy that if you go over, you get a separate alert. If an airline’s mileage program can tell you how many of your miles are about to expire, any bank that is FDIC insured should be required to inform depositors at least on their regular statements regarding exactly how much of their money is not covered, the amount or percent of the overage, and the 1-800 customer service number to call, before, not after, the fact.

Example: This month your accounts under Tax ID xx-xxxxxxx are 30% over the FDIC insurance amount. Please call 1-800-your bank’scustomerservicedepartment at your earliest convenience to make sure all of your money is fully insured.

This would not cost a thing.

2. For the FDIC to clear up its website and to include clear information regarding sweep accounts, CDARs, and other legitimate, insured cash management tools, in clear, consumer-oriented language. The current FDIC site now contains endless pages of muddled examples and information for the “employees of financial institutions.” (Incidentally, something must be brewing as the FDIC just added a “satisfaction” rating tool over the last few days regarding its website usefulness, which it is not.)

3. For the FDIC to follow transparent and fair procedures in takeovers that allow for legitimate and verifiable business operating expenses, including payroll checks, tax filings, retirement moneys, health insurance premiums, and the like to clear, and finally

4. For the FDIC to meet with members of Congress including Senator Christopher Dodd as Chair of the Senate Banking Committee, and Barney Frank, as Chairman of the House Banking Committee, to implement these changes and to provide expedited relief for business depositors with verifiable liabilities. After all, if you are running a business and have receivables, retirement funds and payrolls to fund, it is inconceivable that the FDIC’s sophisticated financial gurus would implement their IndyMac takeover on the last Friday before a major payroll date and not be aware that even small businesses need to take care of outstanding liabilities, prepare payrolls, fund paychecks, prepare for pending tax filings, store retirement funds, and handle client payments that might temporarily put them over.

If you are interested in contacting the FDIC and your representatives, please visit www.FDICbusinessalert.com to send your email message to your House and Senate representatives, including California Senators Feinstein and Boxer, and these FDIC staffers: Andrew Gray, the FDIC’s Media Director, David Barr, the FDIC Media California Contact, and Sheila Bair, FDIC’s Chair.

Other interested officials are Senator Christopher Dodd, Chairman of the Senate Banking Committee, Senator Charles Schumer, Banking Committee member, Representative Barney Frank, Chair of the House Financial Services committee, Henry Paulson, Jr., Secretary of the Treasury, and Nancy Pelosi, Speaker of the House.

The list of members of the House Banking Committee is available here and includes these California representatives: Joe Baca, John Campbell, Kevin McCarthy, Gary Miller, Edward Royce, Brad Sherman, Jackie Speier, and Maxine Waters. You may also want to contact Congressional Representative Barbara Lee (Oakland, CA) whose office has assigned a person specifically to handle depositors in her area.

After all, if you want small business to survive in California amidst this volatile banking environment, somehow the idea of FDIC protection needs to be fair.

Fran Quittel is a technology recruiter and business writer based in Emeryville, California. She has a newly created website to help improve FDIC protection for small businesses.

Posted on July 27, 2008

Comments

Why is anyone surprised by any of this?

I have FOR MONTHS been warning people to get all accounts below the FDIC basic limits. That's $100,000 per person, per institution, period.

You can play CDARS if you want, or other funny "structuring games." You might win that game, you might lose.

For anyone who is unaware, the FDIC is an arm of the government. They can and will disallow such "structuring" at any time they choose. So far they have not chosen. They might in the future. You wish to gamble, be my guest.

As for allowing "business liabilities" as an offset against deposits, forget it. That has NEVER been part of the FDIC's insurance guarantee. You're now asking for RETROACTIVE changes to benefit you, when you didn't pay attention to your accounts.

I ran a business for 20 years, selling it in 1998. It was essentially impossible NOT to be over the FDIC limits from time to time, particularly at payroll. Basically ANY business with more than a handful of employees isn't going to be able to make payroll and keep under the limits, and that's a fact.

What this means is that it is ON YOU as a business own to PAY ATTENTION TO THE BANK YOU DO BUSINESS WITH.

IndyMac was NOT new to trouble. Their stock price from October to the day before they went under went from $25 to near zero.

Their share price went under $5 in APRIL and was under $2 FOR MORE THAN A MONTH!

You had TWO FULL MONTHS of warning that these folks were in serious, perhaps CRITICAL trouble (what do YOU call an 80% decline in stock price?) and yet you left your money there? Who's fault is this?

It is YOUR RESPONSIBILITY to verify and keep on top of your banking relationships, just as it is your CUSTOMER relationships. Would you allow a CUSTOMER to go in the toilet for TWO OR THREE MONTHS before taking payment action? Hell no.

So why did you sit on your hands when your BANK went in the toilet?

There is a lesson here, and its to PAY ATTENTION. There are a LOT of financial institutions in trouble right now.

The FDIC has done nothing wrong. You made a bet on an institution that the market had given a solid vote of "no confidence" and lost.

To those out there reading this - GET BELOW FDIC LIMITS NOW - EVERYWHERE.

If you CAN'T for short periods of time - a day or two to make Payroll, for example - then put THAT segregated portion of your operating funds as necessary in one of the stronger banks that DOES NOT have exposure to bubble-based Real Estate.

ALL banks with bubble-based commercial and residential Real Estate, and that's a lot of them, are subject to this risk. If you get burned, its YOUR fault, because at this point, more than a year into the collapse of the lending bubble, any businessperson who isn't aware of the risks is acting in a willfully-blind manner.

Running a business competently requires WORK. If you're not willing to do so, who's fault is it when your firm blows up?

Go have a look in the mirror!

Posted by: Karl at July 27, 2008 08:53 AM

Um, the rules are not muddled. This lady just wants to blame someone else for her mistakes in not checking the insurance rules. The FDIC is bailing her out. Were it not for them, she wouldn't get any of his money back, and she's lucky she even gets the 50% above 100K back. Where is the personal responsibility? Why can't she just say, "Ooops, I didn't check the coverage. I'm not covered. That's my mistake and I will just have to eat it." I guess I'm too used to trading now and eating all my mistakes (which are a hell of a lot more than 100K) to sympathize with someone who can admit a mistake and take responsibility for it. Maybe the nation of whiners comment wasn't that far off for some areas.

Posted by: Sandra at July 27, 2008 08:58 AM

Everyone knows that you're only covered to $100k.

The FDIC bailed you out. They spent $8 Billion (or more# of the FDIC fund in order to do so. They gave you 50% out of the kindness of their hearts #and to the detrement of taxpayers#. They shouldn't have done so, because there is now less money available to bail out smart people #that stay within the limits) at the next failed bank.

Congratulations, you just got a taxpayer bailout and you're whining that it wasn't enough?

This is one example why the universal debt bubble was so large: Everyone believed that they would be bailed out no matter how big a mistake they made.

And now it's all falling apart, the unraveling of the universal debt bubble will be a severe drag on the economy for years as people finally start to pay attention to the realities of the world.

Posted by: ComWiz at July 27, 2008 10:17 AM

Bank takeovers are on Fridays.

IMO you should get nothing over 100k. The FDIC is being "nice" in giving you 50% over that. Count your blessings.

Please be LUCKY in your endeavor, enough so that you do an IPO. Anyone who cannot understand basic black and white insurance limits will we a juicy target and i will mercilessly short your stock all the way to zero.

Posted by: lowbeyond at July 27, 2008 10:44 AM

It seems to me that some of the comments here have missed or mistated the thrust of this article.

The author of this article was not an investor in Indy Mac. She was a depositor and used the bank to pay the bills of her business. And it's not like she had a bunch of cash here that was not encumbered by debt. It was in the process of being transferred for payroll owed, taxes owed, etc.

She is saying that there should be a simple method--on the monthly statements on these bank accounts that places account holders on better notice that they are above the $100K limit that the FDIC insures these accounts for. Seems to me that this is eminently reasonable and restrained.

I might go farther and increase the amount that is guaranteed. I'm not sure when the level was set at $100,000. Having to have multiple accounts at multiple banks or S&L's or requiring folks to investigate and continually monitor the institutions where this level of money is sitting waiting to pay bills, seems to me not reflective of what brought the FDIC and this guarantee about in the first place. What are folks supposed to do--keep money in their mattresses like they did 100 years ago?

Posted by: Frank D. Russo at July 27, 2008 12:50 PM

Gerald Leob did mention in the past: as long as you deposit money in any institution and get paid an interest for their troubles for storing your liquidity, you are already an investor in that institution.

Depositors in banks are already investors in banks. There is no difference.

Posted by: Junkyard at July 27, 2008 01:09 PM

What if you have a non-interest bearing account--like a checking account?

Posted by: Frank D. Russo at July 27, 2008 01:29 PM

You are still an investor.

You are allowing the bank to BORROW your money.

Where do you think they get it from? They don't invent money - they get it from depositors who allow them to borrow it for something of value, whether that's interest or "safe keeping" and "instant access".

Think about it. They have a vault and if someone robs them you don't lose. How much is that worth? If you didn't use a bank and kept $100,000 in your home or business, you'd have to screen and hire a guard, buy private insurance, maybe buy an expensive safe (for protection against fire, etc) and perhaps even be willing to purchase firearms and be willing to use them.

This is all valuable to you, and you loan your money to them in exchange for those services.

They in turn loan that money out to other people at interest.

I am STUNNED that people do not understand the basics of how a bank works and why you'd want to (or not) use one, along with the failure to understand that ALL depositors are in fact investors in that bank.

Has our educational system really degenerated THAT far?

Posted by: Karl at July 27, 2008 07:37 PM

Sorry, but I don't think of my money deposited in a non interest bearing account as an "investment." On the rare occasions where it exceeded $100,000 (when I settled a large case) and it was almost always needed to pay other bills, I had to wait for it to clear and then wrote checks. what was I supposed to do--ask the insruance carrier to split it up into smaller amounts so I could scatter it around?

I can understand how as a definitional matter you can say I was an investor in the bank. Fine. My point still holds about the purposes of the FDIC, the need for notice that is pointed out in the article, and perhaps the need to increase the amount that is protected. Plus the need for greater scrutiny by the Federal Government of the banks they insure. You may disagree with that policy judgment.

You can make your remarks about the educational system--and I don't know where that takes you on this question really. Most folks do not consider themselves investors in banks when they open a checking account.

And yes, I took economics at the same college as our President.

Posted by: Frank D. Russo at July 27, 2008 08:05 PM

I don't own a business and I've never had more than $100k in savings, but I've known, jeez, since HIGH SCHOOL, that you're only protected to $100k. How can anyone run a business and a) not know this, or b)not know the technicalities which may create temporary risks (e.g. liabilities).

This is not a nation of whiners; this is a nation of helpless infants who now depend on the gov't to THINK for us, apparently. Apparently, we need the gov't to do basic math for us when we buy a house, too. Hmmm, I make $2000 a month, so I guess I should take that $4000 a month mortgage.

It's unbelievable we haven't been the subject of a military invasion from north, south, east, and west. We're all just helpless infants now.

Posted by: tm at July 28, 2008 07:06 AM

I understand that you're upset at losing money. But if you had gotten your money out, would you still be as upset as you are now? Others beat you to the punch.

The problem was people just started taking their money out. You expect anyone related to the bank to say "psst, come get your money out quick before you lose 50% of anything over 100k/250k." That's not fair. The world isn't fair. And like i've told everyone else, don't feel bad for most people who've lost 100's of k's. They don't care you only have $900 in the bank and are struggling to make ends meet. I don't feel bad for people with 3 homes!

Posted by: anon at July 28, 2008 08:49 AM

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