Millions of Americans have wondered about the safety of their savings in the past few weeks, as some giant banks and other financial institutions have failed or gone into a kind of receivership with the federal government. The dramatic collapse on Thursday of Washington Mutual, by far the largest bank failure in U.S. history, pushes the question to the center of the stage.  

As the Wa Mu failure illustrates, this is not a matter of market risk from falling stock prices or rising interest rates. Instead the fear is that someone who is holding your money may go out of business altogether, taking part or all of your savings with it.

The frontline guarantor of your bank accounts is the government’s Federal Deposit Insurance Corporation, founded in 1933 to prevent bank runs. In the Wa Mu failure, the FDIC managed to sell the failed Seattle thrift to JPMorgan Chase for about $2 billion, thus circumventing the use of FDIC funds. Had the FDIC not found a buyer, reports are that as much as $30 billion of the roughly $45 billion left in FDIC reserves might have been needed to safeguard Wa Mu's customers' deposits. 

So this is a good time to get back to basics as to what exactly the FDIC's job is, and how that affects you. 

To begin with, the FDIC offers two general kinds of insurance for deposits held in FDIC-insured banks.

The first provides up to $100,000 in backing for the money you hold in a given bank in your various checking or savings accounts, certificates of deposit (CDs), trusts, or money-market deposit accounts (which are like savings accounts that offer limited checking privileges).

What is not covered? The contents of safe-deposit boxes. This means that any items stolen from a safe-deposit box or damaged in a fire or flood are not the responsibility of the FDIC, although the individual bank may make the loss good.

The second type of FDIC insurance covers up to $250,000 per individual for certain types of qualified retirement funds (IRAs, SEP accounts, and the like).

What is not covered? Various investment accounts, including stocks, bonds, or any mutual funds the bank may have sold you. 

Until last week, money-market funds (which are highly liquid investment funds) also lacked FDIC coverage. But when Lehman Brothers went bankrupt, a money-market fund (the Reserve Primary Fund) took losses on debts Lehman Brothers owed it. As a result, the fund’s share value fell below its $1 par value. In response, the Fed stepped in to guarantee such $1 par values for other money-market funds—at least for the next year.

Below are some further questions and answers concerning FDIC coverage.

Q: How reliable is the FDIC backing up to $100,000 per person at commercial and savings banks?

A: Pretty much rock solid up to the first $100,000 you have in an FDIC-insured bank. Wa Mu aside, the FDIC may have to request more funding because of the failure of a dozen or so banks (including the giant Indy Mac in California). But this will not in the end affect the reliability of the FDIC guarantee. It is as close to sacred as anything in the U.S. financial system, on a par with the reliability of U.S. Treasury securities. (On the other hand, and to be realistic, the net result of these and other current bailouts may be higher inflation and reduced purchasing power for your dollars.)

Q: If my bank fails, how long will it take to get my FDIC-insured deposits back? 

According to the FDIC website, the answer is, "Historically, the FDIC pays insurance within a few days after a bank closing...." By implication, and insofar as the recent tumult in the banking system may differ from the past, it probably makes sense today to keep enough cash on hand to pay for a month's expenses. 

Q: What if I have three different accounts in the same bank adding up to $150,000?

A: If your name is the only one on them, then $50,000 of it is not insured by the FDIC!

Q: How could I get the full $150,000 in my accounts at the same bank FDIC-insured?

A: Two main ways. First you could turn one or more of the accounts into one held jointly by you and, say, another family member. Then for every account with a second (or third) name, the $100,000 backing is doubled (or tripled).

Second, you could add a payable-on-death (POD) provision to the account, which is like the first option but comes into play only at your death, when the balance in your account would go to the POD recipient. Here as well, adding a POD recipient doubles the FDIC backing on the account in question.

Q: Are there drawbacks to using POD accounts to increase the FDIC coverage?

For one thing, only some relatives qualify to be listed on your POD account. These are your parents, children, spouse, siblings, and grandchildren. (That means, not your grandparents, aunts and uncles, or nieces and nephews.) Also, the POD account may conflict with the terms of your will, where for example all three of your children are to receive equal shares of assets, but only one is listed as the beneficiary of the POD account. Just as when a variable annuity names a beneficiary, in other words, a POD account kicks in before a will is read and executed. That way lies possible conflict and probate court.

Q: What about spreading my savings and checking accounts around different banks?

A: That would work, even with only your name on each account, so long as no one bank had over $100,000 in the accounts you hold there.  But it can get confusing to try to keep track of accounts held at a number of different banks.  At tax time, the result will be that you will receive a different 1099 form for each different bank.

Q: Does anyone insure the investment account (such as mutual funds) that I hold with a broker like Morgan Stanley or Merrill Lynch?

A: Not the FDIC.  But there is a private organization called the Securities Investor Protection Corporation (or SIPC) that has a strong record over the past 30 years of making good on customer accounts when a broker goes out of business. Here as earlier, we are not talking about market or investment risk (the risk that the market value of your holdings will fall). Instead, the SIPC’s role is to make good on any accounts you had at the time a broker failed, in the amount of their current market value.

Q: Does anyone insure my annuity if, as in the recent AIG takeover by the government, an insurance company totters on the brink of bankruptcy?

Again, not the FDIC. This is a murkier issue because insurance regulation has been left largely to the individual states. The general procedure when an insurance company fails is that a state takes over the company’s obligations and does what it can to make good on them. Just how and when that happens will vary by state. As to AIG itself, its component insurance companies were not the problem, and they are likely to remain on their feet, even given a federal takeover. But at this point, that is only a conjecture.

Q: How can I find out more about the status of my bank accounts? 

A: The FDIC has just enlisted the financial writer Suze Orman (of PBS fame) to provide a human face for its calculator, EDIE. This allows you to enter the name of your bank and the account numbers of your deposits to see whether you are fully FDIC-insured. (EDIE is short for Electronic Deposit Insurance Estimator.) Upon request, the calculator will print out the results for each of your accounts and banks. 

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