(From the October 6th edition of the Las Vegas Penny Press)

Betting on banks can be long shot

Commentary by Wyatt Cox

I had to say goodbye to my bank this week.

When I moved to Las Vegas in 1996, I left a small local bank in White Springs Florida behind. I enjoyed the fact that any banking problems were handled locally and there were no real problems that the local branch couldn't usually handle. I left there with my nest egg - a couple thousand dollars--in cash, since I didn't count on being able to easily convert an out of town check to cash out here.

I figured I'd open a bank account with a local bank out here without any problem.

Boy, was I wrong.

I got here just as the big banks were gobbling up every small bank they could find. The stories from friends of having major problems with banks after their bank was assimilated had a dual effect.

I was skittish about opening an account with a smaller institution for fear they would be the next target for the banking Borg, and I didn't want to do business with the Borg directly.

I was looking at this new (then) phenomenon of Online Banking, when I came across Netbank.

At the time (1999) they were well rated, well reviewed, and paid interest on my checking with no service fees.

How could I go wrong. They even gave me $50 after my account was open for 6 months as an incentive!

I did direct deposit from my work paycheck, never had to worry about the money not being there, free mail and next day UPS service for check deposits, and the telephone representatives were always pleasant and helpful, especially the time that my wallet was stolen on the bus with my ATM/VISA card. They helped me shut it down in minutes and got me a new one on the way promptly.

In sort, apart from not having a branch to walk into, they took care of all my banking needs just fine, thank you.

I didn't follow their problems as closely in the media as I should have, else I would not have gotten blindsided last week.

 It seems Netbank got caught up in the subprime mortgage crisis more severely than I thought. Defaults were serious enough that the Office of Thrift Supervision shut them down on Friday.

Now I have access to my money, as all their accounts were transferred to ING Direct, a division of Dutch financial concern ING. Under what basis I continue as a customer of theirs remains to be seen.

As I have a move to another city pending in the not too distant future, I may ride it out with them until the relocation.

The weekend was nerve wracking. But things have settled down a bit. For me, all is almost back to normal.

It turns out that I was lucky.

Brooklyn based tech firm Applied Cognetics had about $1 million in deposits with Netbank on Friday. The firm was stunned to learn of the loss of their bank. More importantly, they had $120,000 in bills due on Monday, or $20,000 more than their insured deposits.

A press release from the FDIC indicates that depositors of NetBank with deposits in excess of the insurance limits (media reports say upwards of $109 million) will receive an immediate payment of 50% of their uninsured balance from the FDIC as receiver. So short term, Applied Cognetics is out $450,000. Long term, who knows where that figure will settle.

Ironically, Applied Cognetics was a firm based on subprime mortgage lending lead generation. The subprime collapse was what ultimately caused the collapse of Netbank.

It's not just the big boys that have gotten shaken by this.

Mark Robertson writes that his wife took early retirement due to cancer, and parked her retirement IRA at NetBank. His mom's old age money is there too. They're just over the insured limit and worried.

Once upon a time, $100,000 was a huge nest egg. It's significantly more than I have stashed away, but given the extremely low interest rates being paid today by any reliable institution and how medical bills can blow through that in a heartbeat, that's literally chump change.

I started figuring that if I should ever win a million in cash, how I'd have to spread that million across multiple institutions and instruments to keep my money safe.

I suspect it's going to get a whole lot worse before it gets better.

I fully intended to open an account with a quality local bank, but ended up getting an account with one of the smaller of the Borg. What the heck. It's only for a few months.....

I think I have this principle behind the whole "Sub-prime" concept worked out.

You know how you go to the new car lot and eye that $20,000 car that you can never really afford. But the dealer gives you that finance rate that's just too good to be true. So you take it.

Immediately, the minute you drive that car off the lot, you're in the hole. Between depreciation, deferred finance charges, and next year's models, you immediately owe more on your vehicle than it's worth. It continues that way for at least a couple of years. You are, as they say, upside down in your car financially. Eventually you get to the point that between this charge and that charge, you can't afford that new car, park it, and get a rattletrap, or you walk, or if you're like me, you bike or bus. The highly depreciated car lands on a lot somewhere at a deep discount, your credit is stuck, the dealer ends up making a profit, the finance company makes a profit, they sell your note to a collection agency, and you still probably end up paying.

Fast forward to today.

You buy one of these newly built houses with nothing down and a loan that doesn't even cover the interest on the overpriced piece of miniaturized real estate. Immediately you are upside down in the house, owing more than the house is currently worth.

In theory, your home will appreciate, your income will increase, and you'll be able to bring things around so that you are paying more and more toward the balance and less toward the interest.

Unfortunately, too many of these loans have been made to too many people who can't afford them.

And what you're seeing now is only the beginning

Theoretically we have a finite supply of real estate.

Theoretically real estate should always appreciate in value.

But the way homes are being built on too many postage stamp lots, well, I don't think the values are going to escalate much longer. A correction is on the way.

And it could cost a lot of people a lot of money.

And you can't just park a house.

Sidenote: On my old time radio retrospective this weekend I will air an episode of the CBS Radio Workshop from 1956 entitled Subways are for Sleeping. It's an adaptation of a Harpers Magazine article by Edmond G Love. Love would expand the article to a full length book about the experiences of a number of people who avoided the everyday grind by living day to day, without homes, without materialistic good, without regular jobs or shelter.

Wyatt Cox doesn't sleep in the subway or stand in the pouring rain, but he does occasionally nap on the CAT. You can interrupt his CAT naps at rant.wyattcox.net