Loss in confidence in banks causes huge shifts in deposits

— -- The exodus of money from the stock market and troubled banks is reshaping the financial industry as quickly as any government bailout.

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 weakening the financial condition of more stable institutions — making them vulnerable merger targets — and tipping troubled ones into insolvency.

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, of Brooklyn, N.Y., says he's moving a chunk of his money to a local bank because he can't get a straight answer from his midsize 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."

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 consumer 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 institutions, 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, jpmconsidered one of the healthier players, saw its deposits jump 9% from the second to the third quarter to $969 billion. Including the deposits of Washington Mutual, which it recently acquired, deposits jumped 34%.

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 service and hand holding.

Coda Hale, 27, a software engineer for Wesabe, a website aimed at helping consumers manage their money, moved his savings from Washington Mutual to Mechanics Bank, in Richmond, Calif., 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% 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%.

"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 Roundtable, 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.

Ngan Adams, 34, opened a checking account at Partners Federal Credit Union the week that Lehman Bros. declared bankruptcy and she heard rumors that Washington Mutual might be next. Adams says she likes that the credit union is "very conservative. I thought I should put my money in an institution that has the same ethics."

Similarly, the troubles at Pasadena-based IndyMac, which was closed by the FDIC in July, contributed to a pickup in business at Wescom Credit Union, also based in Pasadena, says Wescom Chief Executive Darren Williams.

Overall, bank deposits are rising — by more than $158 billion from August to September — as investors yank money out of stocks, bonds and other investments and put it in banks.

In September, investors withdrew $56.2 billion from stock funds, according to the Investment Company Institute, a trade group for investment firms. It was the fourth consecutive month that stock funds lost money.

Corporate bonds and muni bonds are also losing money in the "broadest market downturn that we've seen since the 1970s," says Brian Reid, chief economist of the investment group.

Robert Cantwell, 57, pulled hundreds of thousands of dollars — his entire investment portfolio — from the stock market last year when he heard loan defaults could cripple bank earnings.

"We decided," says Cantwell, of Flower Mound, Texas, "that this was the time to sit out the market." Cantwell put his money into bank CDs instead.

Stock market woes, however, aren't benefiting all financial institutions.

A recent survey by the Credit Union National Association found that a fourth of credit unions have had above-average growth in deposits the last six weeks, but 40% said deposits were growing at a weaker rate than a year earlier.

Bill Hampel, the trade group's chief economist, attributes the slowdown to confusion over whether credit union accounts are federally insured. Most credit union deposits are federally insured for up to $250,000. But because credit unions are insured by the National Credit Union Administration, not the FDIC, that message is sometimes lost on consumers, credit union officials say.

Diversifying bank portfolios

The government's temporary boost in deposit insurance has given more consumers confidence to keep their money at one institution. But despite such protection, some consumers still seek out multiple banks, banks and analysts say.

"We are definitely seeing some customers trying to rationalize and diversify their portfolio," says Gary Perlin, CFO of Capital One. "There is more consumer uncertainty in this environment than we've seen in a long time."

Lingering fear about the safety of bank funds may also be a factor, says Sullivan, of Capital Performance: "Having a lot of your eggs in a single basket has felt like an unsafe thing to do lately, no matter what the government says."

Still, as long as funds are federally insured, depositors should not worry about losing their money, says Stephen Brobeck, executive director of Consumer Federation of America, an advocacy group: "There's no way the government won't meet its federal deposit insurance guarantees."

FDIC spokesman David Barr says the agency has a "flawless track record" of protecting consumers' life savings. "In our 75-year history, not a single customer has ever lost a penny of insured funds as a result of a bank failure," Barr notes.

These assurances provide little comfort to Walerstein, of Brooklyn. He says the collapse of the mortgage market, along with the use of taxpayer money to prop up the financial system, has made it hard for him to trust the government.

"If there's a major run (on the banks), I worry that there's a lot of us that will be out in the cold," Walerstein says.

In Decatur, Ind., Joe Obringer, 43, says he's taken a chunk of money out of banks and is holding onto it until the markets calm down, in case he can't get access to his money. "All we've got left is our savings," Obringer says.

"If we lose that, because we've got family to support, that would be tough."