A Run on Your Money?

In ordinary times, a public discussion on deposit insurance would hold all the frisson of a seminar on Canadian land use. But these are no ordinary times. Last Wednesday at the Chicago Mercantile Exchange, a bank of television cameras, several reporters and about 100 people picking at their lunch—arugula salad, stuffed chicken, a strange fruit/cream confection—paid close attention when a 50-something woman with the mien of a professor took the podium. Sheila Bair, chairman of the Federal Deposit Insurance Corp., stood under a large banner reading "CONFIDENCE AND STABILITY"—an unsubtle attempt to bolster flagging confidence in the nation's financial sector. The panel discussion, featuring Terry Savage, the Suze Orman of the Windy City, was part of a $5 million public education campaign marking the FDIC's 75th anniversary. As Bair told me before the excitement began: "We're bringing in local experts, and banks, and talking about deposit insurance." Par-TAY!

After several years on the D-list, deposit insurance is hot. The FDIC's Website last Monday tallied a record 9 million hits, with nary a mention of Brangelina's twins. Traffic was driven by concerns about IndyMac, the big California lender taken over by the FDIC on July 11, and by general concerns about banks' health.

Bair, who taught at the University of Massachusetts before taking the helm of the FDIC in mid-2006, is a part-time children's book author (Rock, Brock and the Savings Shock, tells the story of twin brothers: Brock stows away cash earned from chores while Rock splurges on gewgaws like a toy moose head. Ultimately, Brock bails out the spendthrift Rock by establishing a joint savings account.) And today, she is standing at the schoolhouse door and urging the restive kids to chill. "The overwhelming majority of banks in this country continue to be well-capitalized," she said.

The FDIC was created, over the vociferous opposition of its beneficiaries—the banking industry—in the dark spring of 1933, when 4,000 banks had closed. Francis Sisson, then-president of the American Bankers Association, thought the idea of having banks kick in to a fund that would insure individual banks against losses--and the entire system against the contagion of bank runs—was "unsound, unscientific, unjust, and dangerous."

But it worked. In 75 years, no insured deposit—the current limit for a regular account is $100,000—has been lost, even in the lean years between 1986 and 1992, when 2,304 institutions went tapioca. From June 25, 2004, when the tiny Bank of Ephraim in Ephraim, Utah, went under, until February 2, 2007, when the tiny Metropolitan Savings Bank in Pittsburgh, Pa., went bust, the FDIC enjoyed its longest failure-free streak. "It was two-and-a-half years, but who's counting?" said Bair. (Bair has the most developed sense of irony of any regulator I've interviewed this year).

Like Maytag repairmen, FDIC staffers who deal with failed banks grew lonely and a little out of practice. But now, anticipating a rise in business, the agency has called dozens of veterans out of retirement and is hiring. Five banks have failed this year (Here's a list of failures this decade), and Bair expects more. Ninety banks are on the FDIC's problem list.