O.K., Don't Panic
By Barbara Kiviat
You probably have questions. And not "What does CDO mean again?" sorts of questions but more along the lines of "Is it time to hide under the covers?" Here we tackle some popular queries--while emphasizing that just because we discuss the possibility of bad things happening doesn't mean they will.
INVESTMENT
What happens if I have a brokerage account at a firm that goes bankrupt?
Those are your assets, not the company's, and its creditors have no right to your money. One hopes the transfer to a new brokerage should go smoothly: federal regulators show up to oversee the process. In the worst-case (and highly unlikely) scenario that some of your assets are missing, SIPC insurance kicks in, covering $500,000 worth of securities, including $100,000 in cash.
ACTION: Call your broker to talk about the transfer
SAVINGS
Is it time to pull my money out of the bank and put it under the mattress?
No. But it may be time to make sure you don't have more than $100,000 in any one bank. The FDIC insures that amount should your bank fail--plus $250,000 for retirement accounts that hold bank products like CDs. On Sept. 16, however, there was an event in the normally unexcitable world of money-market funds. Because of a loss on Lehman debt, a money fund marked its share value below $1--sacrilege for an investment meant to be akin to cash. A mass redemption followed. If more money funds "break the buck," you may be tempted to move to FDIC-insured accounts. Just keep in mind that they might yield less, and only one money market has ever been liquidated--in 1994.
ACTION: Sit tight
MORTGAGE
What happens if my mortgage lender runs into trouble?
If the company that holds your mortgage fails, your loan, along with all others, will be assets in a bankruptcy proceeding. Chances are, some bank will come along and buy the loans, and then you'll have to mail your mortgage payment to a new address. That's it. The callable mortgage--in which a lender can demand its money back--pretty much ended with the Great Depression.
ACTION: Keep paying your mortgage. Please
STOCKS AND BONDS
How should I be investing now?
On Sept. 15, the Dow fell 504 points. Pretty drastic. The next day it gained 142 points. The lesson: these are volatile days and weeks, and timing the market is a crapshoot, even for the pros. The ability of ordinary investors to move in and out of investments at the right moment tends to be pretty bad anyway. A longitudinal study by the research firm Dalbar shows that as mutual-fund investors increase the length of time they hold their funds, they do better relative to stock and bond indexes. "Our emotions are backward-looking, but the market is always about what's going to happen," says David Yeske, a financial planner in San Francisco. So no running for the exits. That said, it may be a good time to see if you're properly diversified--in a blend of stocks, bonds, foreign and domestic securities, big and small companies. One thing that's clear: If there's another hit, there will be little telling where it's going to come from.
ACTION: As ever, focus on the long term and stay invested in a diversified portfolio
INSURANCE
What happens if I have an insurance policy with a company that goes belly up?
Are you asking because the Federal Government took over AIG? We thought so. First things first: AIG's insurance subsidiaries are solvent and continuing to pay claims. If--and this is a big if--individual insurance subsidiaries run into trouble, a state regulator will step in. That regulator might try to move policies to another carrier--"The insurance industry has a pretty good track record of taking care of itself," says Atlanta-based wealth manager Chris Dardaman--though new insurers may be allowed to adjust policy terms. If push really comes to shove and the subsidiary liquidates, you are still protected in different ways, depending on what sort of policy you have:
VARIABLE-RATE ANNUITY
Money invested in a variable-rate annuity goes into mutual-fund-like sub-accounts, which are walled off from the general account the insurer uses for its other obligations. It's like having a set of mutual funds at a broker: SEC regulations apply, and AIG's creditors can't tap those assets.
ACTION: No need to transfer your money, but why not make this an opportunity to remind yourself of your policy's terms?
FIXED-RATE ANNUITY, LIFE INSURANCE, HEALTH INSURANCE
Claims on these policies get paid from the firm's general account--the place your premiums go. As long as the company is solvent, things work normally. But let's assume a worst-case scenario: a state regulator steps in, can't get the firm back on track and decides to liquidate. As a policyholder, you're in line ahead of creditors. If the insurer is in real trouble and can no longer pay claims, then the state's guarantee fund kicks in. It varies from state to state, but generally you have at least $300,000 worth of total coverage.
ACTION: Keep an open line to your insurance agent.
PROPERTY AND CASUALTY INSURANCE
For policies like homeowners' and auto insurance, there's a separate state guarantee fund that will be tapped in a worst-case scenario, like what's outlined at left. Again, limits vary by state, but in many cases you'll be covered up to $300,000. For property and casualty insurance, you'll typically be covered by the state fund for 30 days after a firm is liquidated, to give you enough time to get a new provider.
ACTION: Keep paying your premiums