The ABC report came as consumers are watching for any news of trouble at their banks during turmoil in the financial industry. The worries stem in part from news last week that Pasadena, Calif.-based IndyMac had failed, forcing its takeover by the Federal Deposit Insurance Corp. In a chaotic scene, customers lined up outside the bank this week, trying to withdraw their funds.
The news on IndyMac preceded the Bush administration's announcement over the weekend that it will implement a plan to shore up Freddie Mac and Fannie Mae in the wake of Wall Street concerns that the nation's two largest mortgage lenders were at risk of insolvency. The two companies guarantee more than $5 trillion in mortgages, accounting for about half the nation's total.
President Bush sought Tuesday to calm consumers worried about the safety of their bank deposits and a souring economy. Speaking to reporters, Bush declared the nation's banks "basically sound." But he said there is no quick fix to rising concerns about energy prices and inflation - two factors hampering an economic recovery.
FDIC Chairwoman Sheila Blair also appeared on CBS' The Early Show Tuesday to assure consumers that the banking system as a whole is "absolutely safe." The FDIC insures bank deposits of up to $100,000 per depositor and up to $250,000 for funds in retirement accounts such as IRAs.
Banking analysts agreed with Blair's assessment yesterday but said the mortgage lending crisis will likely result in the failure of 150 to 200 banks during the next 18 months to two years.
Elinda Kiss, a Tyser teaching fellow at the University of Maryland's Robert H. Smith School of Business, who specializes in finance and banking, said fear and lack of knowledge drive consumers to panic in the face of such turmoil. Some consumers have heard stories or know people who lost money during the Depression, she said.
"They hear something bad and it's mob psychology," Kiss said. "They are afraid. I don't think people understand deposit insurance."
Concern over Eastern Savings Bank occurred when ABCnews.com said it appeared on lists of troubled banks compiled by research groups and financial analysts. But the lists rely on financial measures that distort Eastern's fiscal well-being, the senior bank official said.
