A year ago, on October 9, 2007, the Dow Jones Industrial average reached an all-time high of 14,165.  Yesterday, on October 9, 2008, the index had fallen by 39 percent, to 8,579. As the Wall Street Journal pointed out, the plunge erased $8.4 trillion in the value of U.S. stocks, the equivalent of more than half of the nation’s total output (GDP) for 2007.  A recent government report says retirement accounts shrank by more than $2 trillion in the same period.

If you were going to get out of stocks, the right time to do it was a year ago—or even a month ago, before the most recent 20 percent drop. Now is too late. The usual advice here, however frustrating, is to sit tight and wait for the market to go back up. Otherwise, you will convert a paper loss into a real one.

Does that mean that this the right time to buy stocks, now that their prices have been hammered? Maybe, but no one can say for sure.  It could be that stock prices will drop another 1,000 points, 2,000 points, or even more before turning around.

In the meantime, and absent a crystal ball, it may help to review the safety of your bank deposits. To that end, we offer an update of a post from two weeks ago, to take account of new FDIC limits on deposit insurance.

The frontline guarantor of your bank accounts is the government’s Federal Deposit Insurance Corporation, founded in 1933 to prevent bank runs.

The FDIC offers two general kinds of insurance for deposits held in FDIC-insured banks.

The first now provides up to $250,000 in backing for the money you hold as deposits in a given bank and its branches. The insured deposits include your checking and savings accounts, certificates of deposit (CDs), trusts, and money-market deposit accounts (which are like savings accounts but offer a handful of checks or withdrawals per month).  

The $250,000 limit represents a change in the rules that took effect in the giant bank bailout law of October 3. The limit was raised from $100,000.  While the change is supposedly for only one year, few observers expect the increase will be allowed to expire a year from now.

Money-market deposit accounts are not the same as money-market funds.  To sum up a confusing issue, the rules have been changed to give money-market funds FDIC backing.  However, such backing will not apply to any new transfers into funds made after September 19, 2008.

What is not covered? The contents of safe-deposit boxes.  This means that any items stolen from a safe-deposit box or damaged in a fire or flood are not the responsibility of the FDIC, although the individual bank may make the loss good.

The second type of FDIC insurance covers up to $250,000 per individual for certain types of qualified retirement funds such as IRAs and SEP accounts. The new law left that amount in place as a ceiling. Now both deposit accounts and retirement accounts are insured up to $250,000 per account holder.

What is not covered? Various investment accounts, including stocks, bonds, or any mutual funds the bank may have sold you. 

We turn now to further questions and answers concerning FDIC coverage.

Q: How reliable is the FDIC backing up to $250,000 per person at commercial and savings banks?
A: Pretty much rock solid up to the first $250,000 you have in an FDIC-insured bank. While the FDIC itself may have to request more money because of the failure of a dozen or so banks—including the giant Indy Mac in California, which cost the FDIC about $9 billion—this will not affect the reliability of the FDIC guarantee.  It is as close to sacred as anything in the U.S. financial system, on a par with the reliability of U.S. Treasury securities.  (On the other hand, and to be realistic, the net result of these and other current bailouts may be higher inflation and reduced purchasing power for your dollars.)

Q: If my bank fails, how long will it take to get my FDIC-insured deposits back?
A: According to the FDIC, the answer is: “Historically, the FDIC pays insurance within a few days after a bank closing….”  By implication, and insofar as the recent tumult in the banking system may differ from those in the past, it may make sense today to keep enough cash on hand to pay for a month’s expenses.

Q: What if I have three different accounts (say, checking, savings, and a CD) in the same bank adding up to $300,000?
A: If only your name is on them, $50,000 is not insured by the FDIC!

Q: How could I get the full $300,000 in my accounts at the same bank FDIC-insured?
A: Two main ways. You could turn one or more of the accounts into one held jointly by you and, say, your spouse. Then for every account with a second (or even a third) name, the $250,000 backing is doubled (or tripled).

Or you could add a payable-on-death (POD) provision to the account, which is like the first option but comes into play only at your death, when the balance in your account would go to the POD recipient. As with a jointly held account, adding a POD recipient doubles the FDIC backing.

Q: Are there drawbacks to using POD accounts to increase the FDIC coverage?
A: Again, two stand out. First, only some relatives qualify to be listed on your POD account. These are parents, children, spouse, siblings, and grandchildren. That means not your grandparents, aunts and uncles, or nieces and nephews.

Second, the POD account may conflict with the terms of your will. For example, if all three of your children are named in your will to receive equal shares of assets, this would conflict with a POD account that listed only one of them as the beneficiary. A POD account kicks in before a will is read and executed. This paves the way for possible conflict and probate court.

Q: What about spreading my savings and checking accounts around different banks?
A: That would work, even with only your name on each account, so long as no one bank had more than $250,000 in the accounts you hold there. But it can get confusing to try to keep track of accounts held at a number of different banks.  At tax time, the result will be that you will receive a different 1099 form for each different bank.

By the way, this will not work for different branches of the same bank: the FDIC counts them all as a single insured bank.

Q: How can I find out more about the status of my bank accounts?
A: The FDIC has just asked the financial writer Suze Orman (of PBS fame) to provide a human face for its calculator, EDIE. This allows you to enter the name of your bank and the account numbers of your deposits to see whether you are fully FDIC-insured. (EDIE is short for Electronic Deposit Insurance Estimator.) Upon your request, the calculator will print out the results for each of your accounts and banks.  

Q: Are there any further changes likely in the FDIC coverage rules?
A: Word is that the Treasury is considering automatically backing all bank deposits without limit, as some European governments have already moved to do. At the time of this post, that remains only a proposal under discussion, not yet a reality.

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