The Day My Bank Failed

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I was recently chatting with some acquaintances -- older folks, in or near retirement -- who were worried about IndyMac and the other bank failures that have been in the news recently. They remembered their parents' tales of the Great Depression, and they were worried that America was headed for another era of bank runs, long lines, lost savings, and various other flavors of personal ruination.

"What should we do?" they asked me. "Stuff our cash in mattresses?"

That was a joke, but at the same time, it wasn't. They were really worried, just as many people in and near retirement are. Few banks look really strong and safe right now, and for folks who don't follow financial news closely, it all seems like a blur of bad news, tinged with hints of imminent disaster.

Thankfully, this isn't the Great Depression. Things really are different now. Pulling all your cash out of your bank and stuffing it in your mattress is a really bad idea -- and not just because it'll be too lumpy to yield a good night's sleep. Whether your bank is "in trouble" or not, there are good reasons to leave your money where it is -- and few good reasons to take it out.

Trust me on this. I've been through it.

The day my bank went bust
Early in 1991, the FDIC seized Bank of New England, where I had been banking for several months. I didn't have much money deposited there, just a few thousand dollars, but that's a lot when you're less than a year out of college, as I was. Losing it would have been painful.

Was it scary? Not at all -- at least, not after I'd called my dad, a bank executive, and heard the reality of what was likely to happen. Sure enough, just as Dad had said, my experience of the bank barely changed after the FDIC takeover. My money was all there, my ATM card worked just fine, and my local branch stayed open, with the same familiar faces at the teller windows.

I want to be clear about this, so I'll say it again: Nothing changed. My bank went bust, the FDIC seized it, and I lost nothing. Not a cent.

Eventually, as the liquidation progressed, my branch closed, and my account was transferred to a local Fleet Bank (now part of Bank of America (NYSE: BAC)) branch. And that was that. Life went on, just as life is going on for most IndyMac depositors.

If you have a lot of money in the bank
As my fellow Fool Dan Caplinger recently pointed out, FDIC insurance means that the vast majority of people with bank deposits won't lose a cent if their bank is seized. As long as your balances are within the FDIC's insurance limits, there's no reason to pull your money out. If your balances exceed the limits, it's worth thinking about making some of the changes that Dan suggested.

But there are good reasons to think about moving that money anyway. Rates are pretty lousy right now -- check out these 3-month CD rates:

Bank	3-month CD rate	3- month Jumbo CD rate
Washington Mutual (NYSE: WM)	1.00%	1.19%
Wells Fargo (NYSE: WFC)	1.24%	1.69%
HSBC (NYSE: HBC)	1.73%	1.73%
Capital One (NYSE: COF)	0.95%	0.95%

Source: Bankrate.com.

But where to move it? If I needed to keep the money in cash, I'd choose a money market fund, preferably from a big fund family like Vanguard or Fidelity. Compare those CD rates to the current 2.42% 7-day yield on Fidelity Cash Reserves. That fund holds "commercial paper" -- very safe, very-short-term bonds issued by large companies. A recent list of Cash Reserves' holdings included paper from Kellogg (NYSE: K), Home Depot (NYSE: HD), and many other names you'd recognize.

It may not be backed by the U.S. government like an FDIC-insured CD, but it is backed by the reputation of Fidelity Investments. If a Fidelity money market fund were to "break the buck" and lose money, it would be catastrophic to Fidelity's business and reputation. The company's not legally obliged to absorb losses, and it can pass them on to shareholders, but other fund companies have absorbed losses in their money market funds in the past. In a crisis, I'd be shocked if a company like Fidelity or Vanguard didn't do the same.

That said, there are even safer options, such as a money market fund that holds U.S. Treasury obligations. Like the FDIC itself, Treasuries are backed by the U.S. government, so the risk is just about zero. You'll take an interest rate hit -- Fidelity U.S. Treasury Money Market Fund's 7-day yield is 1.42% at the moment, roughly comparable to those CDs -- but if you need maximum protection for your cash, it doesn't get much better than this.