So what do you do?

Experts advise caution, patience for consumers rattled by recent rapid-fire events in the financial marketplace

Q&a

September 16, 2008|By Jamie Smith Hopkins and Dan Thanh Dang | Jamie Smith Hopkins and Dan Thanh Dang and,jamie.smith.hopkins@baltsun.com and dan.thanh.dang@baltsun.com

One financial giant bankrupt, two struggling to survive: It's enough to make any consumer nervous.

Bank of America announced yesterday that it would buy Merrill Lynch & Co., a move designed to prevent the investment bank from falling into bankruptcy. Lehman Brothers, unable to secure a similar deal, filed yesterday for Chapter 11 protection. American International Group, which offers life insurance and other products, received special permission yesterday to use its subsidiaries' capital to stave off immediate problems. And all this comes on the heels of 11 failures of federally insured banks this year.

If the titans of Wall Street and the country's biggest insurance company are in trouble, is anyone safe? Where's a risk-averse person supposed to put his or her money nowadays?

"I would just encourage everyone to take a deep breath," said John R. Hill, chief executive of Pinnacle Advisory Group, a private wealth manager in Columbia.

Greg McBride, senior financial analyst at Bankrate.com, said his advice is no different today than it was "last week, a year ago or 10 years ago."

"This really doesn't change the long-term game plan for consumers, such as saving for retirement, college education or other goals," he said. He's not recommending you start making deposits under your mattress.

Other questions that might be running through your head right now:

Is there such a thing as a safe investment anymore?

"Your safest type of investment is putting it into a bank account, but this should really only be done with short-term investments," said McBride. "The comparatively low return on bank accounts will not grow the buying power of your nest egg. Also, if you place all your money in savings and checking, you leave yourself at risk for a bank failure."

Treasury bills and bonds are safer still, if you hold them until they mature.

Are 401(k)s and other retirement accounts protected if they're managed by a brokerage house that goes bankrupt? What about regular investment accounts?

Any securities you've bought are yours. They're still yours if your brokerage firm goes bankrupt, McBride said, but should a problem crop up, you're covered up to $500,000 by the Securities Investor Protection Corp. But note that only $100,000 can be for cash, in case you're holding a lot of unspent dollars in your investment or retirement account.

Want to make sure your firm is SIPC insured? Call 202-371-8300 or go to www.sipc.org.

What happens if an insurance company goes out of business or encounters financial problems?

Insurers that experience severe financial difficulties are taken over by the insurance department of the state in which they are based. The Maryland Insurance Administration said that Maryland customers of a failed insurer can expect that most claims - for home, auto, life and health insurance benefits - will be capped at $300,000. Workers' compensation claims are not capped.

How much FDIC coverage do depositors have for their bank accounts?

No one used to ask, but local banks have been hearing this question in the past four to six weeks from people with accounts both big and small, said Alison Tavik, a spokeswoman with the Maryland Bankers Association. "In today's economy, people want to know specifically 'how it applies to me,'" she said.

The Federal Deposit Insurance Corp., founded in 1933 amid Depression-era bank failures, insures your deposits up to certain maximums in various ownership categories at any one institution. That can add up to a lot more than $100,000 at a single bank, depending on how you save your money.

You're insured up to $100,000 in an individual account. You're also personally insured up to $100,000 on a joint account and so is anyone whose name is on it with you - so if you're married with a joint account, that's up to $200,000 between the two of you just for that account. Individual retirement accounts are insured up to $250,000.

"Keep in mind that savings and checking accounts are one ownership category, so if you've got $100,000 in your savings and $100,000 in your checking, you're only insured for $100,000," McBride said.

There's another way to get more FDIC coverage: Spread your money between different banks. (Not different branches, mind; different institutions.)

Want to know more about whether you're completely covered? Go to www.fdic.com/edie.

What happens to customers' money if their bank fails?

If you kept your deposits under the FDIC-insured maximum, you shouldn't notice any changes other than the name on the bank door, said LaJuan Williams-Dickerson, a spokeswoman with the federal agency.

If you're over the limit, "you wait in line with other creditors to see how much of that you'll get back," McBride said.

Have any Maryland banks failed?

Not for years. A string of banks in the state were taken over by the FDIC in the early 1990s during the savings and loan crisis.

When will things calm down?

That's what everyone would like to know, financial experts included. Hill, with Pinnacle Advisory Group, thinks markets will stabilize at least somewhat next year.

"But we do expect it to be bumpy. We do expect it to be challenging," he said.

Though Hill said his company is getting few calls from jittery clients, he knows people can't help thinking about the worsening upheaval.

"Now is a very good time to be patient," Hill said.

Until things calm down, who should be worried?

Employees and shareholders of companies going under, McBride said. He thinks yesterday's announcements don't have much impact on average folks.

"Consumers should worry if they spend more money than they make, if they haven't saved money, if they don't have an adequate emergency fund ... and they're not saving for the future," he said.

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