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The financial system is dealing with the worst housing meltdown since the Great Depression and is fending off an extraordinary number of body blows: the Bear Stearns debacle, the Washington Mutual bank failure, the takeover of Fannie Mae and Freddie Mac, the Lehman Bros. bankruptcy and the government’s bailout of American Insurance Group and seemingly everyone on Wall Street.

The events of the past few months have many people reeling. My e-mail inbox and the MSN Money message boards have been flooded with readers’ questions about the financial crisis.

Here are answers to some of those questions.

How can I tell if my bank will fail?
The short answer: You can’t. The Federal Deposit Insurance Corp. doesn’t publicize the names of banks on its “problem list.” According to the American Bankers Association, most banks on the list recover and return to profitability without intervention. Others are snapped up before the government can intervene, as in Citigroup’s purchase of Wachovia.

Ratings services such as Bankrate.com’s Safe and Sound system and TheStreet.com Ratings try to measure the relative strength of the nation’s financial institutions. Some troubled banks recover, while others plunge quickly into insolvency. For more, see “What if your bank fails?”

If my bank fails, will I still have access to my money?
If you’re at the gas pump trying to use a debit card, for instance, will it just not work one day? You’ll most likely have uninterrupted access to your accounts even as your money is transferred to a new bank.

Regulators usually shut down failed banks on Fridays. The FDIC then works all weekend to transfer insured deposits and most of the bank’s assets to the bank that’s taking over the business, or to a new entity created for just this purpose. (For example, Washington Mutual’s insured deposits and assets were transferred to JPMorgan Chase this way.)

In the meantime, depositors could access their accounts via ATMs, debit cards and checks. On the following Monday, it would be business as usual.

In the rare event that the FDIC couldn’t find a buyer and a new bank were not created, then the bank would shut down and you’d be without access to your money for a few days. Debit cards and ATMs would not work, and checks that hadn’t cleared would be returned with a “bank closed” notation. On the Monday after the closure, the FDIC would begin sending checks to customers for the amount of their insured deposits.

Are credit unions insured the same way?
All federally chartered and most state-chartered credit unions are insured by the National Credit Union Share Insurance Fund, which is a federal fund that is backed — like the FDIC — by the full faith and credit of the U.S. government. The share-insurance fund is an arm of the National Credit Union Administration, a federal agency.
Funds in these credit unions are insured to the same amounts as FDIC-insured accounts: $250,000 per depositor per credit union, and up to $250,000 coverage for certain retirement accounts.

A few state-chartered credit unions are not covered by the NCUSIF but instead get coverage from private insurers, such as American Share Insurance, which are not insured or backed by the U.S. government.

How about my investments? Are they insured?
Investment accounts, even those purchased through bank branches, aren’t covered by the FDIC.

They are, however, typically covered by the Securities Investor Protection Corp., which provides up to $500,000 per customer to restore funds to investors with assets in bankrupt or troubled brokerage firms.
The SIPC’s protection is limited, however. You’re not protected against swings in the market, investment losses or investment fraud.

To be covered, your brokerage needs to be an SIPC member. To check, visit the SIPC Web site or call -202-371-8300.

Should I bail out of the stock market?
If you already have all the money you’re ever going to need, sure.

If you’re like most of us, though, you’re still working toward financial independence, and you need the long-term returns of the stock market to get there. In the long run, stocks perform better than any other investment — but you may have to weather times like these once in awhile.

Even if you’re in retirement, financial planners will typically tell you to keep at least 50% of your assets in stocks and stock mutual funds to overcome inflation’s effects and ensure you don’t run out of money.

Are money market funds still safe?
On Sept. 16, 2008, we got the disturbing news that one of the nation’s oldest money market funds “broke the buck,” or allowed its share price to dip below $1. The $65 billion Reserve Primary Fund held $785 million in short-term obligations from the now-defunct Lehman Bros., making those investments worthless.

This was a big deal because money markets have been touted as super-safe places to park your cash. In the past, mutual fund companies rushed to inject their own money if the value of their investments dropped far enough to threaten the sacred $1-a-share mark.

If you’ve got cash in a money market fund that you’ll need within the next couple of years and you’re concerned, you can consider transferring it to an FDIC-insured bank. Just pay attention to the FDIC insurance limits — typically $250,000 per depositor per bank.

MSN Money columnist Jim Jubak predicted in September 2007 that this would happen, by the way. So did MSN Money columnist Jon Markman, in “Your ‘safe’ money isn’t so safe.” You should start reading these guys if you don’t already.

I have an insurance policy with AIG. Am I still covered?
Yes. AIG’s insurance businesses are still operating. The company ran into trouble in other areas, specifically by selling contracts meant to protect buyers against defaults on a variety of assets, including mortgage loans. As mortgages went bad and housing values plunged, so did the value of these contracts, which helped lead to the company’s tens of billions in losses.

Further, every state has guaranty associations that ensure policyholders continue to receive some level of coverage. Although limits differ, most states offer up to:
$300,000 in life insurance death benefits.

$100,000 in cash surrender or withdrawal value for life insurance.

$100,000 in withdrawal and cash values for annuities.

$100,000 in health insurance policy benefits.

Property insurance guaranty funds, which step in for insolvent homeowners or auto insurers, pay out the policy’s limits or $300,000, whichever is less.

What about other insurers? Should I be concerned about them?
You always want to monitor the strength of your insurer, as its ability to pay out claims in excess of the guaranty amounts may be at stake.

Several companies rate insurers, including A.M. Best, Moody’s and Standard & Poor’s. Insure.com offers an interactive tool to check S&P ratings.

If you want to switch to another insurer, your options may be many — or nonexistent. You typically can transfer annuity money from one company to another in what’s known as a 1035 exchange without triggering taxes, although you may owe surrender charges.

If you have a life or health insurance policy and your health has deteriorated, however, you could find getting new coverage difficult.

If there’s a credit crisis, how come my credit card company just raised my limit? Credit card issuers are cozying up to folks they consider good risks while trying to limit the damage that can be done by people they consider bad risks.

That’s why borrowers with mediocre and worse credit scores are finding their credit limits being reduced and their interest rates raised, while those with good scores continue to enjoy excellent access to most forms of credit.

Mortgage lending is somewhat of an exception. You’ll still have far more options if you have good scores, but you may also need a bigger down payment (or more equity, if you’re refinancing) than you have in the past.

What’s going to happen next?
Nobody knows. Things could get worse, much worse or better.
If you feel like you simply must do something, though, consider contributing money to the American Red Cross. (See “How to give even when you’re broke.”) While we worry and fret about what disasters might happen, the Red Cross is dealing with disasters that are happening. Open your wallet for someone else, and I’ll make one rock-solid prediction: You’re going to feel at least a little better.

by Liz Pulliam Weston

http://articles.moneycentral.msn.com/