The Sky is Falling!

I never thought I'd ever witness one of these, but there was a "bank run" or "run on the bank" here in California. Basically, it means bank customers get scared and withdraw all of their money at once or in a short time. Since most banks invest their funds in long-term investments, bank runs can be devastating as was the case with Indymac Bank. The bank was subsequently taken over by the U.S. government. There are very few banks in the world that can withstand a bank run, except maybe the Bailey Building & Loan. Even George Bailey understands the seriousness of a bank run.

Look at all these people waiting to withdraw their money.





Here's what I find impressive. They are just calmly sitting there waiting for the bank to open. No riots. No protests. No fires. I think Americans might be some of the most orderly customers in the world. lol



They have a good reason to remain calm. The Federal Deposit Insurance Corporation (FDIC) guarantees your money up to $100,000. Anything over that amount is not covered. However, the FDIC decided to give Indymac customers 50% of their money over $100,000. For example if I had $150,000 in my bank account. I would receive $100,000 plus $25,000 (50% of the amount over). Korea has their own version of the FDIC called the Korea Deposit Insurance Corporation (or KDIC). The Korean government guarantees up to 50,000,000 won (about $50,000). In Britain, they have the Financial Services Compensation Scheme (or FSCS) that guarantees up to 35,000 pounds (around $70,000 U.S.)

What's the lesson here? If you have a lot of money, put the money in several banks. Or better yet, invest it. I think this is a great opportunity to buy big bank stocks. When these smaller regional banks fail, where will the customers put their money? Under their pillow? I doubt it. I think most of them will choose a larger more stable bank. Jim Jubak agrees:

My thesis that this conservatively managed bank (USB) will be able to grab market share thanks to troubles at other banks remains intact. Total average loans grew by 12% from the second quarter of 2007. Total average deposits climbed 14% for the quarter. The increase in provisions for bad loans needs to be put in perspective too. Yes, the net charge offs for bad loans climbed this quarter from the first quarter, but we're still talking about an increase to .98% from .76%. Resident home mortgage charge offs remained below 1% at .91% and the charge offs on home equity and second mortgages climbed to just 1.13%. In the conference call the company said it would conserve capital by reducing its expenditures on buying back shares in order to 1) protect the current dividend of $1.70 a share (The yield on July 16 was 7.49%), and 2) have enough cash to make opportunistic acquisitions in a battered financial industry. I like that thinking. As of July 18, I'm keeping my target price at $44 a share by December 2008. (Full disclosure: I own shares of US Bancorp in my personal portfolio.)