Is My Money Still Safe?

Editor's Note: This is an updated version of the story, reflecting new details and developments.

As the financial panic of 2008 deepens, with markets in free fall and the economy at risk, it's instructive to remember the failure of IndyMac bank last summer. At first, nervous customers lined up to withdraw their money, unaware that their savings were insured by the Federal Deposit Insurance Corp. The panic subsided when the facts became known. Here are the facts now.

The good news: The FDIC has taken over 12 more banks since IndyMac's collapse without incident. And the $700 billion financial rescue plan signed into law Oct. 3 increases the insurance on most bank deposits from $100,000 to $250,000 per person per bank. The bad news: Hundreds more banks are expected to fail before this financial crisis plays itself out. If you are worried about the safety of your money -- in banks or brokerages -- or money you’ve paid your mortgage servicer for taxes or insurance, here are answers to your pressing questions.

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YOUR BANKER

Should I worry about the safety of my bank accounts? In most instances, your money is insured by the FDIC, which is backed by the full faith and credit of the U.S. government, up to a limit of $250,000 at each bank. This new, higher limit is effective through December 31, 2009. Add up all the accounts in your name at a bank, including checking, savings and money-market accounts as well as certificates of deposit. If your funds total more than $250,000, move the excess to another bank.

My spouse and I have a joint checking account, and each of us has individual savings accounts at the same bank. How much insurance does each of us have? Each co-owner of a joint account has $250,000 in insurance, and your individual accounts are each insured for $250,000, for a total of $1,000,000 in this example.

If you want to shelter more cash, you can open revocable-trust or payable-on-death (POD) accounts for your spouse, children, grandchildren, siblings or almost anyone you desire. Each beneficiary’s account is insured up to $250,000. Or you can just move the excess cash to another bank.

My retirement-savings accounts are with my bank. What is the maximum coverage for them? Certain types of retirement accounts are covered by FDIC insurance, including IRAs, Roth IRAs, SEP IRAs and Keogh plans. All deposits in these types of accounts are added together and insured up to $250,000 per person. If you have both a regular and a Roth IRA, the assets would be added together and insured up to $250,000.

I bank at a credit union. Is my money insured? Yes. The National Credit Union Share Insurance Fund (NCUSIF), which was established by Congress and is backed by the U.S. government, insures individual accounts up to $250,000. As with FDIC insurance, a two-person joint account is insured up to $500,000.

Are my credit-union retirement accounts insured? Yes, the NCUSIF covers retirement accounts, too. The funds in traditional and Roth IRAs are added together and insured up to $250,000; Keogh accounts are insured separately up to $250,000. If you have both IRAs and a Keogh at your credit union, you can have a total of $500,000 in insured retirement assets.

I have a bank money-market account. Are those funds insured? Yes, but your money-market deposit account is lumped with all other accounts bearing your name, and together they are insured up to $250,000. Money that you keep in a money-market mutual fund may also be insured. The Treasury recently announced a temporary program to guarantee both taxable and tax-free money-market mutual funds if the fund pays the necessary fee to participate. This insurance program was created after the Prime Reserve Fund "broke the buck" and its share price dropped to 97 cents. It guarantees that money-market funds’ share price will not fluctuate -- that it will remain a constant $1.

If the FDIC takes over my bank, as it recently did with IndyMac Bank, how long will it take for me to have access to my money? IndyMac's depositors had continuous access to their funds through ATM and debit cards. After federal regulators seized the bank on a Friday, some customers did not have online or phone access for a weekend, but everyone had full access to all their insured money by Monday morning.

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If the FDIC takes over my bank, will I lose all my uninsured funds? No. IndyMac account holders had access to 50% of their uninsured funds immediately. When Mutual of Omaha Bank took over First National Bank of Nevada and First Heritage Bank of Newport Beach, Cal., in July, depositors had immediate access to both insured and uninsured funds.

How can I check to see if all my money is insured? Both the FDIC's Web site and the National Credit Union Administration's site have a calculator that allows you to plug in all your accounts and the amounts deposited so you can find out whether any of your money is uninsured. Go to www.fdic.gov and click on the Electronic Deposit Insurance Estimator (EDIE), or go to www.ncua.gov and use its Share Insurance Estimator Report.

YOUR BROKER

What happens to my brokerage account if my firm goes bankrupt? Brokerage firms must follow strict rules about segregating customers' investments from the firm's money, so your accounts should remain intact even if the brokerage goes under and another firm takes over its business. For example, stocks, bonds and mutual funds are physically held by an independent depository, not the brokerage firm.

What if the firm misappropriated my assets? You have another layer of protection in case the firm hasn't followed all of the rules: The Securities Investor Protection Corp. covers stocks, bonds and other assets held at a brokerage firm that goes bust, and nearly every brokerage firm registered with the Securities and Exchange Commission must be a member. "We get involved only when a firm has used up its capital and has misappropriated customers' securities," says Stephen Harbeck, president and chief executive of SIPC.

If a brokerage firm fails, SIPC first tries to transfer the investors' securities to another firm. If that doesn't work, it then attempts to rebuild the investors' portfolios, even buying new stocks or bonds to make up for any missing shares. If the investments aren't available, SIPC will give you cash based on their value when the brokerage failed.

How much does SIPC cover? SIPC first returns your share of the broker's remaining assets, then uses its own funds (up to $500,000 per account, including a $100,000 limit on cash) to buy the same shares that you originally owned.

What happens if I have more than $500,000 at that brokerage firm? The $500,000 limit applies only to the maximum amount of its own money SIPC will spend to make up for any missing securities, not the total amount of money you can get back. If the customers' assets remain largely intact at the brokerage firm, then you can get back a lot more than that SIPC limit, which is a key difference between how SIPC protects brokerage customers and how the FDIC covers bank depositors.

In the 38-year history of SIPC, only 349 people have not received the full value of their accounts from their share of the firm's assets plus SIPC coverage -- and most of those instances occurred three decades ago or more.

If an investor's losses exceed SIPC's limits, the difference is usually covered by the broker's supplemental insurance -- often provided by Lloyd's of London or a new firm called Capco, the Customer Asset Protection Co. Capco provides coverage above SIPC limits to 15 major brokerage firms, including Goldman Sachs, Morgan Stanley, Raymond James and Wachovia Securities.

Do I have access to my money after SIPC takes over? That's the most common problem. It tends to take from one week to two or three months to regain control of your account while SIPC sorts everything out. It can take even longer if the brokerage firm kept shoddy records or was involved in fraud. SIPC does not protect against market losses while your account is in limbo.

For more information about how SIPC works, and to make sure your brokerage firm is a member, go to the SIPC Web site.

YOUR LENDER

What if my mortgage lender or servicer goes belly up? The problem is the lender's, not yours. Continue paying your mortgage as before. During the bankruptcy process, your lender will transfer your loan file to a new owner or servicer, and both parties will notify you by letter. If you mistakenly send your payment to the old lender's address, you won't owe a late fee if you're within the federally mandated 60-day grace period after the transfer.

But what happens to my escrowed funds for taxes and insurance? The money belongs to you, held in trust, so it won't become part of the lender's bankruptcy assets. The new servicer will take over making tax and insurance payments from the account. As a backstop, review your monthly mortgage statement and the escrow account analysis that you should receive from the new servicer within 45 days of the transfer. If anything seems awry, call your lender or servicer, the property-tax office or your insurance company.