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.