Bank failures and small businesses

A small business owner, Fran Quittel, posts in California Progress Report that she lost 50% of her amount deposited over $100,000 when IndyMac failed. Understandably, she is frantic, looking for someone to blame. She thinks the blame goes to the FDIC for not mandating that banks tell depositors in advance that they are over the $100,000 limit. But the real blame belongs to IndyMac who were a major player in subprime. Some of their depositors, like Quittel, are now paying the price for the bank’s recklessness and greed.

Should she have known? Probably. But a small business owner is busy with, well, running a business. Some of us (like me, I trade options on financial stocks) follow bank news closely. To us, it was obvious IndyMac was going down. But to many small business owners, it clearly wasn’t.

Quittel says that banks should routinely notify depositors if they are over the $100,000 limit. This makes sense, especially in these uncertain times. The problem for many business owner is, if they deposit money in the bank to make payroll, they may often be over limit. She thinks liabilities, like payroll, should be applied against the limit, but there’s no feasible way to implement that.

Why, she says, does FDIC seize a bank with no notice on Friday right as many businesses, like hers, are doing payroll? Because FDIC never notifies in advance and because IndyMac was insolvent, that’s why.

Some of the comments are merciless towards her. But over 10,000 IndyMac customers also lost money and it’s clear there will be more bank failures. Some businesses will not be able to withstand such a hit and will go under. Others will be forced to scramble to make payroll and pay the bills.

And the end is nowhere in sight.

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