NetBank Fails, Underscores Importance of FDIC Limits

In case you haven’t heard, online savings bank NetBank was shut down by the Office of Thrift Supervision this past Friday. Apparently, weak underwriting standards on subprime mortgages played a central role in their failure, and in August they were delisted from the Nasdaq Stock Market.

As of right now, visitors to NetBank’s website are greeted by the following:

In short, ING Direct is taking over the deposit accounts, whereas EverBank is taking over the mortgage assets. Customers with under $100k in checking, savings, or other deposit accounts are protected by FDIC insurance ($250k for retirement accounts) and will have full access to their money.

Customers with deposits in excess of the FDIC insurance limits will become creditors of NetBank and will have to await bankruptcy proceedings to see how much they’ll be able to recover. This is a great reminder of why it’s important to heed the FDIC insurance limits. Spread your money around to multiple banks if you must, because you never know when a bank might fail.

11 Responses to “NetBank Fails, Underscores Importance of FDIC Limits”

  1. Anonymous

    I was (am) a Netbank customer, but got skittish when the stock went to $0.25 from ~$6 overnight, combined with Bankrate’s lowest rating.

    My impression of the whole collapse is that most of the deposit accounts are solvent and won’t require a bailout from the FDIC. In fact, I believe that the FDIC closed the bank before it became insolvent, thereby avoiding the need for a bailout.

    Also, even if you had over $100,000 in the bank, the first obligation of any bank assets is to the depositors and last to shareholders.

    In any event, I had come to find Everbank independently of Netbank’s original agreement with them and have most of my money with them at this point (6%APY introductory rate, $50 bonus if you’re not happy after 3 months…). The only thing still at Netbank are my CDs and it looks like I’ll be able to move those rather than entering a new agreement with ING.

  2. Brad: I’m quite sure that doing that (skimming money from the bank and gambling it away) would land you in jail. Yes, it seems as though NetBank was irresponsible, and it’s tax payers (through the FDIC) that will end up footing the bill. But that’s different than out and out swindling.

    Also keep in mind that a portion of the blame lies with the defaulting homeowners who live up to their obligations. Sure, it stupid to loan them the money, but they entered into a contract in which they agreed to pay it back. So it’s not just the bankers in this case that made bad decisions that cost people their savings.

    Don’t get me wrong, I’m not trying to defend NetBank in all of this. I’m just saying that they’re not the only ones at fault.

  3. Anonymous

    Sorry that you didn’t understand my criticism. It’s not that I’m suggesting a bank shouldn’t invest their customers money. It’s just that I feel it’s unfair to make the taxpayers responsible for investment decisions that were predictably going to lead to this end. As a bank manager can I travel to Vegas, bet my customers money, and send the bill for my losses to the taxpayers? Sound like a sweet deal to me. Where do I sign up?

    Call me old-fashioned but I guess I just believe that people who make bad decisions that cost people their savings should show some responsibility and not pass the bill to the taxpayer. But if the S&L bailout in the 80’s didn’t teach people some sense I’m not sure what will.

    Apologies if these sentiments offend anyone.

  4. Anonymous

    Brad, if banks didn’t put your money to use not only would they be unable to pay you interest, but they’d also have to charge you a fee for holding it.

    Unfortunately, NetBank just wasn’t very smart about the uses that they chose for deposited money.

  5. Anonymous

    Such a a strange country where one can make statements like “you never know when a bank might fail.”

    I guess when I was young (and naive) I always thought a bank was a place that stored your money for you. In reality it’s a place that can take your money, put it in risky investments, lose it (though it’s not really *lost* except to you since someone ends up with it, right?), and send the taxpayers the bill for the up to $100,000 and tell you you’re out of luck with the rest.

    Opening a bank has got to be the best get rich scheme in the country.

  6. Anonymous

    I’ve been slowly transitioning away from NetBank ever since the EverBank announcement was made. Fortunately, any remaining accounts (for a foundation I and my wife run) are well within the FDIC limits. It may actually be a very good thing, considering we are now de facto part of ING Direct…

  7. Anonymous

    I saw NetBank’s bankruptcy coming and closed my money market account with them nearly a year ago. Still, I don’t think that any customers lost any money if they have less than $100k on deposit.

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