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NetBank logoNetBank, the online bank with $2.5 billion in assets, has been shut down by the FDIC after investments in risky mortgages defaulted at an alarming rate. Customers with less than $100,000 with the bank will be made whole by FDIC insurance, and those with more will become creditors in the bank's receivership.

While these failures are pretty rare, there are two lessons that investors/savers can take from it:

  • FDIC insurance covers $100,000 of your money with each bank. To avoid the potential for stress (being a creditor in receivership is not a lot of fun), avoid putting more than $100,000 with any one bank. With high-yield savings accounts from banks including EmigrantDirect, E*Trade (NASDAQ: ETFC), Capital One (NYSE: COF), and ING (NYSE: ING), you should be able to find enough banks to spread out your savings, unless your last name happens to be Rockefeller.
  • Already, a well-meaning friend who works at a bank told me about the NetBank meltdown, and explained that "These high-yield savings accounts are very risky. It's much better to go with a brick and mortar bank, even if the interest rate is 1% instead of 5%." Many retail banks will start trying to use that logic to trick customers into saving with them. It's a bunch of crap! Never trust your bank!

FDIC shuts down NetBank originally appeared on BloggingStocks on Sun, 30 Sep 2007 09:10:00 EST. Please see our terms for use of feeds.

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