The exodus of money from the stock market and troubled banks is reshaping the financial industry as quickly as any government bail-out.
Amid unrelenting economic turmoil, investors are pulling billions of dollars out of the plunging stock market. They’re also withdrawing money en masse from banks perceived as troubled and putting it into others deemed in better shape. And, in a sign of just how nervous Americans have become, some have even started to hoard cash outside of banks.
“People are panicked, and they want something as close to the mattress as they can find,” says Mark Zandi, chief economist at Moody’s Economy.com. “What we’re experiencing now is something we have not seen since the Depression era.”
This whirlwind migration of funds is shoring up the balance sheets of comparatively healthy institutions. The problem is, it’s also weak-ening the financial condition of more stable institutions – making them vulnerable merger targets – and tipping troubled ones into insol-vency.
Complicating matters, the government’s injection of up to $700 billion in the financial system has stoked confidence in some institutions while breeding uncertainty about the survival of others that aren’t getting this financial lifeline.
David Walerstein, for one, says he’s moving a chunk of his money to a local bank because he can’t get a straight answer from his mid-size institution about its financial condition.
“There are hundreds of chaps like myself and my missus who have worked all our lives, been fairly respectable citizens, who have money in banks and are anxious about it,” says Walerstein, 82. “I want to know if that money is safe.”
Consumers Calling
The government has urged consumers to remain calm and is hoping that new increases in deposit insurance limits – to $250,000 for most bank accounts – will stem the panic.
Yet many consumers remain wary. Some are diversifying their money among multiple banks. Others are poring over complex financial statements to determine whether their bank will be the next to fail. In recent months, Veribanc, a bank-rating company in Woonsocket, R.I., has gotten “hundreds of requests” for information from consumers worried their banks will fail, says President Michael Heller.
Nearly one in three consumers in a recent Nielsen Claritas survey said they were concerned about their personal savings accounts. More, though, were worried about the financial markets or their retirement accounts than their bank accounts.
Of the 3,000 consumers polled, one in five said they were likely to move at least some of their funds to another institution in the near future, with nearly one in 10 likely to move all their money.
The withdrawals reflect consumers’ widespread distrust of financial institutions and of government actions, analysts say. And until banks and the government regain investors’ trust, withdrawals will continue.
“The movement of money has enormous implications for our economy, for individual companies and their viability,” says Mary Beth Sullivan, managing partner at Capital Performance Group, a financial industry consultant. “It says something about the American con-sumer and about confidence.”
Boon For Some Banks
The financial upheaval is benefiting large banks and community banks most, says economist Zandi: “The losers are the midsized insti-tutions, who can’t operate in as many markets as the big guys and don’t cater to the niches as much as the small guys.”
JPMorgan Chase, considered one of the healthier players, saw its deposits jump 9 percent from the second to the third quarter to $969 billion. Including the deposits of Washington Mutual, which it recently acquired, deposits jumped 34 percent.
By contrast, midsize banks such as Sovereign have seen deposits plunge in recent months, raising concerns about their viability. Last month, Sovereign agreed to sell itself to Santander.
As the financial meltdown spreads globally, consumers are also taking refuge in community banks, long known for their personal ser-vice and hand holding.
Coda Hale, 27, a software engineer for Wesabe, a Web site aimed at helping consumers manage their money, moved his savings from Washington Mutual to a smaller local bank in mid-September. Small banks, he says, “are less focused on creating these bizarre derivatives.”
An October survey by the Independent Community Bankers of America, a trade group, reveals that 70 percent of community banks saw an uptick in deposits in the past year. More than a quarter of the banks surveyed saw deposits grow by at least 11 percent.
Panic
“I don’t think we’ve had this kind of movement of money since at least the Great Depression,” says Cam Fine, chief executive of the Independent Community Bankers of America. “It’s historic.”
Even during the savings and loan crisis of the 1980s, consumers weren’t as panicked – and prone to moving money – as today, says James Chessen, chief economist of the American Bankers Association, a trade group.
In a market ruled by investor fear, banks of all sizes worry that they could be the next victim of the downturn.
“A rumor festers into fact, and people react accordingly,” says Scott Talbott, senior vice president of the Financial Services Roundta-ble, which represents large banks.
Indeed, the cascade of rumors – and news – about banks can nudge even the most steadfast consumers to take their money and run.
