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The Collapse of An Online Bank

Contributed by mm | September 28, 2007 8:18 PM PST

NetBank, one of the first online-only banks in the 1990s, finally made to the Wall Street Journal headlines again. Unfortunately, this time, the news is NetBank is closed by federal regulators after suffering significant loss in the aftermath of housing bubble. According to the notice shown on the NetBank homepage:

On September 28, 2007, NetBank, Alpharetta, GA was closed by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. All insured depositors are now customers of ING Direct Bank, member FDIC. No advance notice is given to the public when a financial institution is closed.

The FDIC has assembled useful information regarding your relationship with this institution. Besides a checking account, you may have Certificates of Deposit, a business checking account, a Social Security direct deposit, and other relationships with the institution. The FDIC has compiled information which should answer many of your questions.

Most NetBank customers shouldn't worry too much. Federal regulators have arranged a swift sale of NetBank's banking accounts to ING Direct, which has published a quick FAQ list reassuring that customers will continue to have access to the money as usual for the amount that is insured by FDIC (up to $100,000 per depositor). For those who has trusted NetBank with more than 100 grand, however, they will become creditors of the now defunct bank as it files the Chapter 11 bankruptcy on Friday. It is likely that they will only recover 50 cents per dollar on the uninsured position.

As an ex-customer and ex-shareholder, I'm not that surprised. In fact, lured by its generous signup promotions, I opened checking and savings account at NetBank in 2002. Back then, I only had banking accounts with my local credit union. Satisfied with the simplicity of NetBank's online model and novelty, and driven by the almost ignorance of investment then, I also became a NetBank shareholder that year.

At one point of time, I have a total balance of $52,000 with NetBank. However, after a while, I noticed that NetBank does not have a competitive edge and couldn't keep up with the rates advertised by other online savings outlets (especially ING Direct), so I moved my money out of NetBank and essentially abandoned it.

At the same time, I was reading its quarterly SEC filings and realized that it lacked a strategy to grow the business and its financial performance had been subpar, so I chose to sell my stocks in mid 2003 -- I actually made a $283 profit of my original investment of $2,050 in about a year's time.

The news today is a good reminder call to those who are chasing yields regardless of the quality of the bank you are entrusting money to. In today's issue, WSJ also reported that Countrywide Bank, the banking arm of the troubled mortgage originator, is attracting new savings at a speed of $50 millions per day. Obviously, many people are glued to the 5.50% APY rate while other banks are cutting rates after the announcement of 0.50% drop of Fed rate last week. However, people might need to worry whether it is worthwhile to take the risk to get the paltry improvement of less than $100 a year on a $10,000 investment.

For now, I'm satisfied with parking my cash with Fidelity's money market account funds now. The fund giant is unlikely to fail, and even it does, my money in the money market funds is still safe as they are managed separately.

This Post Has Received 26 Comments. Share Your Opinions Too.

Creative Investor Commented on September 29, 2007

I was wondering about some of those online banks... I'm glad the risk-averse side of me has gotten the best of me. Have you used ING Direct? If you did, what is your impression of it? Thanks.

dellis Commented on September 29, 2007

all insured accounts were transfered to ING. But what about those accounts that werent insured.

MM Commented on September 29, 2007

Creative Investor: ING Direct is not bad, but since it has the biggest share of online deposits, it does not have the incentive to offer the best rates, though.

Dellis: All banking accounts have been transferred to ING Direct, although you might not withdraw the non-insured part. FDIC will offer a 50% "dividend" for the non-insured part.

Billy Commented on September 29, 2007

How do you feel about the internet arms of brick and mortar banks? Particularly HSBC direct? Do you feel they might ever feel the same pressures as NetBank?

Krimo Commented on September 30, 2007

Do you think e-loan will be next?

LJ Commented on October 3, 2007

Wow - I was a NetBank customer for years but I got frustrated with their service and switched to a brick and mortar bank for ease of deposits.

I actually just initiated a change of my major checking and Savings account from US Bank and Emigrant Direct to ETrade for a few different reasons. I don't see ETrade going under but seeing this happen to NetBank is a good reminder to not keep all of your money with one institution.

stocksandmarkets Commented on October 6, 2007

I think HSBC Direct is fine. They were the first ones to acknowledge mortgage problems and I believe they closed one of their mortgage units last week.
But on the positive side, they are the largest bank with huge international exposure. The possibility of it going under is very low. I have most of my cash sitting HSBC Direct. I also moved a nice portion of my cash to Bank of America's Online CD account few months before the rate cut. Commented on October 15, 2007

I was also a NetBank customer (for some 4-5 years) and was getting frustrated with their service. I've since switched to BofA because they seem to have a branch on every corner and offerred a $100 sign on bonus for a new, free checking account! While I did keep a decent amount of cash in my NetBank money market account, it was insured and the transition was simple (I will admit I had a few minutes of panic until I verified that my MM was, in fact, insured). BofA interest rates stink, but electronic transfers to and from my Vanguard account are very simply, so it doesn't really cost me anything.

Mary Ann Commented on October 21, 2007

Online banking just isn’t a service people can view as added-value anymore. Everyone offers it. In order for banks to survive they need to listen to consumers and actually offer useful services. Look at what Citi has done with Obopay. Citi has partnered with an outside company to provide useful mobile payments to their existing customers. This partnership is the first of its kind, but in order to survive we’re going to more see Banks offering these unique and innovative services to their customers.

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