Are bigger banks that are involved in Troubled Asset Relief Program (TARP) funds a safer place to deposit your money, or is it wiser to stash it in smaller banks that seem to be avoiding the lion’s share of financial problems during the economic downturn?
That depends, say industry watchers.
“As long as you stay within FDIC limits, now $250,000 per depositor, per insured bank, you’re fine,” said Stacey Wall, CEO of Pinnacle Trust, a wealth management firm in Ridgeland.
The Federal Deposit Insurance Corporation (FDIC), Wall pointed out, which was established by The Glass-Steagall Act of 1933 in response to the 1929 stock market crash, protects depositors against the loss of their (certain) deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.
“If you’re talking about bank deposits covered by the FDIC, I don’t think you have to worry about where your money is,” said Jeremy Chalmers, a Philadelphia attorney specializing in financial matters. “There are some precautions you should consider. If, for example, you have $1 million, you would want to discuss with your banker how to structure accounts so that each account has no more than $250,000 and is FDIC insured. After exhausting that, spread your accounts to other FDIC-insured banks to reduce your uncompensated risk of default.”
Jackson-based Wealth Management’s Roger Muns recalled a client calling him a month ago, concerned about his deposit of $450,000 at a small bank.
“I started doing some homework,” said Muns, a chartered financial analyst and a certified public accountant who recently presided over the CFA Society of Mississippi. “The bank’s executive officer said they were exceptionally strong and immediately provided me with extensive P&L and balance sheet information. Based on this, the deposits remained at the bank instead of spread among several FDIC-insured banks.”
Wall pointed out that FDIC insurance covers all types of deposits received at an insured bank, including deposits in checking, NOW and savings accounts, money market deposit accounts and time deposits such as certificates of deposit (CDs). FDIC deposit insurance covers the balance of each depositor’s account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank’s closing.
However, Wall added, the FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if these investments were bought from an insured bank. And the FDIC does not insure U.S. Treasury bills, bonds or notes.
If the primary question about where money is better placed involves investments in a bank, that’s a different story, said Chalmers.
“At a minimum, the TARP money was dilutive to investors, or at least potentially dilutive, because the government received warrants to buy the common stock in the future,” he explained. “TARP money also required the bank to issue new preferred shares that pay 5 percent for five years and then 9 percent until TARP money has been repaid.
On Christmas Eve, the U.S. Treasury Department presented details of its own gift of sorts to 49 banks: a $250-billion investment through its Capital Purchase Program, created as part of TARP to help to stabilize and strengthen the nation’s financial system. One caveat: institutions that sell shares to the government must comply with restrictions on executive compensation.
Citigroup, JP Morgan Chase and Wells Fargo each took $25 billion, followed by Bank of America at $15 billion, and Goldman Sachs and Morgan Stanley at $10 billion each. Birmingham, Ala.-based Regions Financial Corp. (NYSE: RF), which does business in Mississippi, took $3.5 billion, the same amount as SunTrust and Capital One.
Last month, ABC News released a survey of 16 TARP banks asking: how has your firm used the TARP money to date? Most banks taking advantage of federal bailout money were earmarking it to build capital, invest and fund operations. Region’s response to the ABC survey: “Using TARP funds to help increase the flow of credit to businesses and consumers as Treasury intended. Will expand lending to consumers and businesses where our standards for credit quality are met and where we can capture the full value of a customer relationship. Regions’ incentive decisions will not be made until the first quarter of 2009, but will certainly reflect company performance during 2008.” By press time, calls to Regions’ Mississippi office had not been returned.
Even though some Mississippi-based banks had the option to use TARP funds, BancorpSouth (NYSE: BXS), Citizens Holding Co. (NASDAQ: CIZN) and Hancock Holding Co. (NASDAQ: HBHC) announced early on their intention not to pursue them.
According to the U.S. Treasury Department as of Jan. 13, two Mississippi-based banks have received federal bailout money. On Nov. 21, Trustmark Corporation (NASDAQ: TRMK) of Jackson received $215 million. On Jan. 9, Cadence Financial Corporation (NASDAQ: CADE) of Starkville received $44 million.
Contact MBJ contributing writer Lynne W. Jeter at Lynne.Jeter@gmail.com.