FDIC Closes Netbank, One of the First Online Banks

An anonymous reader writes "NetBank, one of the first internet banks in the country was closed by the FDIC on Friday. Being a loyal customer for 8 years, I am saddened that an institution that provided me with so much great service and a cool, hi tech way to conduct my financial transactions is shutting down. Seems that mortgage defaults are to blame: 'NetBank's closure marks the first bank to close since the recent U.S. housing boom deflated. Critics have said that weak underwriting standards have led to record number of homeowners entering the foreclosure process. But NetBank's rare Internet-based business strategy made it a unique financial institution and its problems aren't expected to mirror issues facing other mortgage lenders, analysts say.'"

OTS not FDIC

It is the Office of Thrift Supervision that has closed NetBank, not FDIC: http://www.ots.treas.gov/docs/7/777071.html [treas.gov]

NetBank did not have the best interest rates.

Not only is the Slashdot story wrong in that way, it is misleading in another way: "I am saddened that an institution that provided me with so much great service..." NetBank did not, however, have the best interest rates.

GMAC Bank [gmacbank.com] and HSBC Direct [hsbcdirect.com] had h

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Do you mean lower rates? I used to work at a "loan servicer" (and collections agency) and NetBank was one of our clients, at least for their car loans.

Their target market, at the time (2005), was for people with good credit, say FICO 760 and better (don't

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A FICO score of 760 isn't "good" it's great. 650-700 is B to B+ credit (generally one can qualify for a loan but your rates will not be optimum). The scale looks something like this:

475 bottom of the barrel. If you want a loan, you're going to get eaten

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It's not really the poor economy, it's the fact Bush has used a bubble [firedoglake.com] instead of actual growth.

We should have had a minor recession in 2001 or 2002, but then it would have been really hard to convince people they needed to funnel huge amounts of money in

Re:That's irrelevant.

"It's not really the poor economy, it's the fact Bush has used a bubble instead of actual growth."

What exactly did the Bush administration do wrong, as far as economic management goes? No matter who was in power, after 9/11 any politician would have drastically increased homeland security and military spending. The Bush Tax cuts were very popular, and would have been implemented anyway, whether or not Bush was in power. Not only that, but while corruption is very photogenic, it's effects have been economically negligible. Our deficit is mostly the result of highly enlarged entitlement spending, which I just can't see tied to George Bush.

You seem to think that presidents are relevant to macroeconomic trends. This is a common political delusion, but in the absence of massively stupid legislation(On the level of what has been seen in Latin America), the Federal Reserve bank is the only office with any real power.

"This housing boom, OTOH, everyone did have to play. Even renters pay more when houses prices are up, although at least they won't have to watch the value of their house plummet. And it's left us with no tangible benefits at all except millions of shoddy McMansions."

Of course, all that we are left with are millions of homes. What use could they serve?

"We could have put that same amount of effort and money in alternate energy, and be in the middle of a nice stock correction now, where alternate energy company stocks are dropping through the floor and being picked up by a few big players which are merging with the big energy suppliers who are just now realizing they need to change their business plan. Which wouldn't hurt John Q. Public at all. John Q. Public, in fact, came out ahead because he got 'sponsored' for solar panels and that company, with a crappy business plan, went out of business, like during the tech crash."

Really? How exactly could we have done that?

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"Then you're a moron. Clinton left Bush with a balanced budget. Bush has not increased entitlements. Ergo, our deficit cannot be caused by entitlements."

Actually, Bush has raised entitlement spending more than any president since Johnson. The biggest off

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"The prescription drug program didn't give anyone entitlements except the drug companies. If you meant he rose spending, yes, I know. Pretending it's caused by 'entitlements' when it's actually an expansion of the military and corporate welfare is just de

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Inflation is low, Unemployment is low, GDP growth is ok.

Inflation has been roaring during the past decade, but masked by cheap imports and temporary absorption of the money used to pay for those cheap goods.

True unemployment is sky high, around 50%

S&L crisis + DOT COM = housing bubble

Yep, It's a bubble and some people are going lose their shirts.

"It's a great time to buy a house."

"You'll never lose money in real estate".

"Real Estate is a great investment".

"Sone else is bidding on the property".

Bottom line is with stagnant median income, people just can't afford a house. The real estate sector, after an unprecidented run up, is undergoing correction and it will be long and will take some people under. If you're renting or can afford your mortgage, you'll do okay. Every else might as well mail in the keys. If the debt is to netbank, send the jingle mail to ING direct instead. This is the downside of mass immigration and easy money, people. Time to buck up!

Wait, what?

Banks are being closed in the US? Good grief. Here we are worrying about Northern Rock having a bit of a wobble and the US is closing banks!

Nice work on decimating your economy!

In for a Penny...

weak underwriting standards have led to record number of homeowners entering the foreclosure process

I've never understood the wildly inflated home prices in some areas. Assuming that these are "market prices" and not crazy owners' wished-for buyouts, at

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Everything is driven by supply and demand. In the case of the housing market, weak lending practices created a demand much greater than the market would support under normal conditions. It's not hard to predict that the market would eventually catch up to

Depends on the Market

Depends on the market and whether local salaries can support local housing prices. Take NYC -- housing prices continue to rise significantly despire all the market troubles? Why? - Because the average banker (there are thousands of them) can make $350k

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I think its unlikely we will see an equivalent housing boom again. Unless banks and mortgage lenders don't learn from their mistakes.

This is said after every boom and bust, and during the next boom they say "this time is different because..." I remember the Savings and Loans [wikipedia.org] scandal from the 1980s. This current debacle is looking awfully familiar.

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I've never understood the wildly inflated home prices in some areas

I've never understood why it happens over and over. The current thing has nothing on New Orleans in the 1850s (or thereabouts) - but still ...

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***Prices shoot up like that when there is to way too much credit.***

A bit more complex than that. You also need for lenders to be making imprudent loans. It is perfectly possible -- at least in theory -- to be awash in credit, but not to be using it t

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This is all in the hands of the bankers. Let's face most people are not very bright. If someone will give them a credit to buy a house they can't really afford, they'll take it. They don't understand what an adjustable rate it, they don't understand percen

ING acquires deposits

Here is the link on the ING site [ingdirect.com].

The acquisition further strengthens ING DIRECT's position as the leading direct bank which aims to meet the financial needs of "Main Street, USA."

I hope their lending requirements are a little more solid (I hold an Electric Orange account there).

It would seem so

ING Group is pretty major, I don't think they are going under any time soon (ING Direct is one of their divisions). However if it does, you needn't worry as mentioned this is what FIDC insurance is for. Up to $100,000 of your deposit is covered by the FDIC. So unless you've got more than that in there, you are fine. If you do have more, may I suggest you seek the services of a financial consultant, as that is too much money to just leave sit in a bank account, even one with a reasonable interest rate.

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I hope [ING's] lending requirements are a little more solid (I hold an Electric Orange account there).

ING only bought the deposit accounts. Most of NetBank's mortgages are going to Everbank, apparently with the bad one staying with FDIC until they ca

Net 2.0 meets Reality 0.0

FTA:

NetBank's stock price traded around $15 a share in 2004, but it declined and then fell below $5 a share in early 2007. Shares of NetBank fell to $0.07, down $0.01, on Friday.

Damn that pesky old real world!

FDIC insurance

It looks like 1500 people had $109 million over the 100K FDIC insurance limit - an average of about $73K - so they'll probably lose it. Many of these will probably be small amounts, say accumulated interest on $100K deposits; at other extreme, there a lik

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Yup - why anybody would deposit more than $100k in a bank account is beyond me. Banks pay horrible interest - they're only useful for day-to-day liquid activities without large balance requirements, and due to the fact that in the US they're insured up to

$50Million FDIC Insurance?

Shameless plug, as I built most of their tech architecture :-) -- check out Promontory Interfinancial Group's CDARS program. These guys take a regular bank's CD program and extend the FDIC coverage to $50M or more. The rates are basically the same and

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OK so keep 2 of those CD's as your 'safety net' and aggressively invest the rest of it. If you are under 40 you don't have much to lose.

I have most of my money in an agressive allocation fund with my investment company, and the historical return rate is

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It may be worse than that: the FDIC insurance applies to checking and savings accounts, but not money market accounts. Money market account holders can get in line with other creditors during the bankruptcy proceedings. Moral of the story: if you have

Re:FDIC insurance

It largely depends. Many banks have "money market" accounts that are classified as savings accounts as far as the FDIC is concerned and are insured. Many money market accounts are in fact uninsured as well.

Netbank had a "money market" account which was FDIC insured - at least as far as I'm aware (and I did take the time to find out).

I'm guessing it comes down to whether the bank wanted to follow FDIC rules regarding investments/limits/reserves/etc. Most money market mutual funds don't - but they're still very safe due to their investment profile. Also - most non-FDIC-insured money market funds tend to be privately insured against anything but investment risk.

Bottom line is - anybody with any kind of account no matter what it is called or where it is held should be aware of its FDIC-insurance status. Many banks have both insured and non-insured investment products.

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Netbank had a "money market" account which was FDIC insured

Parent is correct. I have a Netbank (now ING) 'Money Market' account that I started about a month ago. I was very concerned so I called the FDIC via the number they have published on the Netbank information sites and was assured that it was insured and

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One small nit -- they're only GUARANTEED to 100k. In practice I believe they've always covered accounts fully. That makes sense, if your goal is to promote public confidence, while leaving yourself an exit if a major bank fails.

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VIII. Dividend Information
Due to the projected sale of assets of the former bank, the FDIC is in the position to provide each uninsured depositor with an dividend equal to 50% of your uninsured amount. These funds will be deposited directly into your account net of your uninsured portion.
Dividend Information on Failed Financial Institutions contains general information about the dividend process.

http://www.fdic.gov/bank/individual/failed/netbank.html [fdic.gov]

Mortgage defaults

The defaults aren't something that 'just happened' to them - they chose to get involved in what anyone should have seen as being an extremely risky market. (Buying mortgage paper on the secondary market.) But the ultimate culprits are the (all but unregulated) mortgage companies, who loan the money then promptly sell the paper - they've taken their money and profit and are walking away virtually scott free from this developing crisis.

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But the ultimate culprits are the (all but unregulated) mortgage companies, who loan the money then promptly sell the paper - they've taken their money and profit and are walking away virtually scott free from this developing crisis.

I dunno - they wouldn't

Alternatives

I've enjoyed using Netbank for several years now, and as someone who moves around a lot having a branchless bank equally accessible from anywhere in the country has been nice. They even have (had) ATMs here in B.F. Mississippi. I'm sad to see them go.

Are

I went with USAA.

For reasons that had nothing to do with any intuition of an impending collapse (I was actually most annoyed that they didn't play nicely with Mac Quicken), I moved all my deposits from NetBank to USAA a few months ago. I've been very happy with USAA; they

Good.

I signed up for an account with them a couple years back and they socked me with several hundred dollars in fees within the first month. Good riddance.

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You neglect to mention why. Netbank doesn't have minimum balance fees or anyting onerous in general, although if you open an account with $100 and proceed to write 75 checks for $1000 each you would easily run into the scenario you describe at any bank.

Ne

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Does ING actually provide paper statements? It seems like charging for paper statements is becoming standard practice in many arenas. In some cases it is standard but there is a monthly charge just for having an account...

And I care why?

I mean, mostly I care because its a bank failure in general. I don't care any more or less because it's 'OMG ONLINE BANK WOW'. And of course, you would expect some banks to fail here and there right now: a lot of them made poor lending decisions and deserv

Lucky me

Wow, guess I got out just in time. I pulled my money out of there a couple months ago, closed the account, and moved it into EverBank [everbank.com]. When I signed up for NetBank in 2004, they had one of the most competitive interest rates for checking accounts availab

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Even if they weren't moving them, saving and checking accounts are insured up to $100,000 in the US.

Although treat that as per-bank, not per-account.

My Wife Was an Analyst for Netbank

My wife used to work for Netbank, at their HQ here in Atlanta.

After her previous company downsized, she talked to Netbank about a job; her first in-person interview was scheduled for September 11, 2001. Oooops. We saw the second tower hit live on the Today show right before she left; once she got there, the nation's entire financial industry went into lockdown, and she spent the whole day sitting in the lobby of their offices. Heh. Was that some kind of omen?

Anyway, she got the job, and went to work doing business analysis -- which promotions actually drew in new customers, what percentage of new customers retained their accounts, et cetera; she also maintained the list of ATMs that were in service and in their network; and was responsible for generating the customer lists for both the various e-mail contacts and the annual privacy policy mailings ( <geek_meat> SAS and SQL, mostly </geek_meat> ).

She really liked her job, and she liked her co-workers.

The turning point for Netbank, IMHO, came after the retirement of one of its founders and a merger with another online bank called RBMG which was located in Columbia, SC (which is, ironically, where we lived before we moved to Atlanta years ago). There were the usual issues of corporate culture which arise during mergers; there were issues regarding differing customer expectations (she ran studies on customer surveys which showed dramatically different attitudes, expectations, and opinions between customers from RBMG and customers from Netbank); there were issues arising from the fact that, although the company retained its Netbank name and identity (and the deal was structured as a Netbank acquisition of RBMG), the center of gravity for the new company was in Columbia, with the former RBMG; and, frankly (again, IMHO), there were issues with RBMG's upper management and corporate strategy.

Netbank "Classic" had been focussed on, and content with, being, well, a bank. Checking and savings, CDs and Money Markets; you know the drill. RBMG, though, had aspirations both grander and farther afield, starting with mortgages (in fact, the "MG" in "RBMG" stood for "Mortgage Group").

That didn't work out too terribly well.

By last year, there were some signs of strain. While the overwhelming majority of folks working in Atlanta and Columbia (and Jacksonville) were really great, and on the ball, there was a bit of a corporate malaise; RBMG ran what seemed to me to be a less employee-friendly operation (one of the first things they did, for instance, was move Netbank's Atlanta HQ from its basic "A" or "B" office space into a semi-crappy converted former retail space which was, at best, a high "C" quality office space). The bad vibe was subtle at first, but it was certainly there; and as the mortgage business began sucking more and more, money got tighter and tighter, and things got less and less functional.

Finally, as last year began to wind down, more and more employees started to jump ship from my wife's group. Eventually, it got to the point where she was more or less forced to jump ship, simply because everyone else already had, and she would be left in department that couldn't possibly do all of the things it was expected to.

By the time she left, right at the end of the year, there was a really grim air about the place; and we got to look on in horror this year as her company stock shares rapidly declined in value to the point where it wasn't even worth bothering to sell them.

We still have a Netbank account with a small amount of money in it, and a lingering bittersweet fondness for the brand and the people who worked for it; but we're certainly not regretting her decision to leave, that's for sure.

Re:Fridays are going to become interesting

You can bet your bottom dollar on it. Oh wait you already did.
You shouldve kept it under the mattress.

No. If my credit union or bank closed tomorrow, I could withdraw all of my funds, up to the bank's insured amount -- which is more than I or most other Americans make in a year.

Now, if I had instead invested my money and bought shares of the bank, then I'd be up shit creek without a paddle. But that's why stocks pay more -- because they're riskier, and so they have to or no one would buy them.

You don't think the value of money changes?

But that's why stocks pay more -- because they're riskier, and so they have to or no one would buy them.

Really. You don't think money is as risky or riskier than say FTSE all-share fund or whatever the US equivalent is.

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Tinfoil hat while under the influence of mind altering substances much?

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For about $40,000, you can get a small one or two bedroom apartment either in the midwest or in a rural town here on the eastern side.

In my city exactly, at fair market value, you could get about 1/5 of a four-bedroom house. For $400,000, you could buy tw

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In California you're pretty much SOL under 200K and you're looking at 300k if you want to live in any reasonably sized city.

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$300k won't buy you a dumpster in Santa Clara County, home to Silicon Valley. Median home price for Aug 2007 was $770k and average selling price was $944k.

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In small midwestern towns (not cities), about $40K would get a decent, but not new, house. Of course, these are areas where housing valuation hasn't boomed like it has on the coasts.

If, however, you were looking at farmland, $40K will get you maybe 8 a

Re:Bank Run in England

The banks won't be bailed out nor will the owners or shareholders of the banks. The banks' customers will be.