Like that famous scene in “Jaws” where Robert Shaw, Richard Dreyfus, and Roy Scheider compare scars, several of us editorial types were in the office not long ago shooting the breeze about financial institutions that had failed on us in the past. I had personal experience on two counts in the 1980s–one a savings and loan where I did my checking; the other an insurance company where I had a few years worth of retirement savings. I got all of my money back in a timely fashion from both defunct firms, and frankly, I didn’t worry too much about it then. In 2008 at the more mature age of 54, I have a little more skin in the game, and I just did some checking on how a bank failure might affect automatic deposits and withdrawals. Child No. 1′s college tuition money is currently sitting in an account at a bank that is, how shall I say it, in trouble by several measures. Out of that account a certain sum is transferred each month to the august institution of higher learning that Child No. 1 attends as a sophomore (we’re on the installment plan). Reassured with what I learned from the FDIC, I started to wonder how I’d feel about the bailouts for failing big firms (or not being allowed to fail) like Bear, Lehman, and the Frannies if I had had, or have, accounts with them or had invested in them and were planning on retiring in six months, or if I were an employee of one of those companies who had much of my net worth sunk into its stock. I know, I know–diversify. Spread your insured accounts around. Keep a six-month emergency fund in cash. Be flexible on your retirement date. Always save and invest for the long run.
Still, if behavioral finance teaches us anything, it’s that we humans fear failure much more than we lust after success. The rash of failures and near-failures has shaken the confidence of investors and advisors alike. The poor performance of financials spurred by the credit crisis has pushed down not only individual stock prices but the returns of many mutual funds. Even high-flying hedge funds are feeling the Icarian heat and have been brought back to earth.