Your Take 
19
comments

Your Take: FDIC Sets Bank Interest Rate Caps

Federal Deposit Insurance Corporation SealNear the end of May, the FDIC Board of Directors approved a rule that capped the interest rate “less than well capitalized institutions” could offer. For quite some time they listed weekly national rates. It was only until last month did they institute rate caps, which are defined as 75 basis points above the national rate. The national rate is just the simple average of rates paid by all insured depository institutions and branches for which data are available.” If a region has a much higher prevailing rate, then banks in that region will be allowed to use local averages plus 75 basis points as the rate cap. This rule wouldn’t go into effect until January 1, 2010.

The idea is that a bank that isn’t well capitalized will be in dire need of some liquidity and boosting your rates is a great way to increase deposits but put you in a difficult spot down the road. When Washington Mutual offered 5% APY certificates of deposit, everyone knew that it was a play for deposits. This rule would make that impossible.

What do you think? Is this a good idea or a bad idea? Do you think that the government is overstepping?

Incidentally, the current rate cap, effective 6/8/2009, on a savings account is 0.96% and a 12 month CD is 1.98% APY. Those are some pretty sad rates.


 Investing 
16
comments

Comparing Fixed Annuities & Certificates of Deposit

Hand Painted Piggy BankWhen I first opened up my Vanguard account a few years ago, I requested all sorts of fancy investment brochures. I had just started Bargaineering and had a voracious appetite for financial information and fancy words like annuities, in all their flavors, really intrigued me because I had never heard of them. One of the books I requested was Vanguard’s booklet on annuities, an investment vehicle I would later learn is rife with ripoffs and unscrupulous characters.

I never read the booklet until my wife and I were cleaning out some documents and they remind me a lot of long term CDs, with a few wrinkles. If there’s anything I’ve learned in the last few years is that the financial community has a funny way of coming up with a million different ways to do the same thing, if only to be able to say they have a hot new investment option for you!

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 Banking 
1
comments

Listen to how the FDIC Seizes a Bank

Federal Deposit Insurance Corporation SealDid you watch the 60 Minutes segment about the FDIC seizing a bank? If you were as fascinated with the process as I was, I have a treat for you. This American Life’s 377th Episode, Scenes From a Recession [download], features the FDIC seizing Bank of Clark County, based in Vancouver, Washington, and selling them to Umpqua Bank back in January.

(Click to continue reading…)


 Banking 
8
comments

Watch The FDIC Seize A Bank

Want to see the FDIC seize a bank? This thirteen minute video has 60 Minutes following the FDIC as they seize and close down the five branches of Heritage Community Bank, a Chicago bank that failed on February 27th, 2009, and was acquired by MB Financial Bank. Closed on a Friday, all branches were open on Saturday.

If you want to skip the build up and want to see what happens when they take over, it starts at around 5 minutes. People freaking out happens a little later on.

All your bank are belong to US.


 Banking 
13
comments

The Basics of Banking Explained

This is the first edition of our Personal Finance Foundation Series where I discuss the very basics of foundation-type personal finance topics. The topic of this post is Banking.

I was fortunate that my first real experience with banking was with a local credit union. Credit unions are really great about welcoming new members and educating them about everything. Commercials banks, while still cordial, simply don’t offer the same types of services that credit unions do. My mom and I opened a joint banking account a local credit union when I was fourteen and I was excited to even have a laminated blue card with my account number and credit union phone numbers! I still have the card in my desk drawer, I still have the account open, and it was a nice warm and welcoming introduction to the banking world.

That, however, seems to be atypical. Many people are introduced to the banking world either through the nastiness of credit cards or by walking into the antiseptic branch of a major bank. You open an account, direct deposit your paycheck, and feel like a number in a database. There is no education, no explanation, just an assumption that “you’ll figure it out eventually.” Well, unfortunately that isn’t enough because “figuring it out” usually results in you being dinged on fees so let’s start from the basics and go through what banking is.

(Click to continue reading…)


 Banking 
4
comments

Certificates of Deposit: Pros & Cons Weighed

Hiding Piggy BankFor the last ten years, certificates of deposit have gotten a terrible rap. Interest rates were low compared to the blockbuster returns of the stock market and you were locked into that CD for 12-, 24-, 60- months, all making it an unappealing investment option. For many, CDs only ever came up in financial conversation when you were talking about laddering an emergency fund because protecting your principal was your number one goal.

Well times have changed and CDs, with their FDIC insurance, have once again come into vogue as investors have plowed hundreds of billions of dollars into the CD market in recent weeks. I personally use CDs to help increase the rate of return on my savings, specifically in laddering my emergency fund, and below I will list three good reasons you should save with CDs and three reasons why you shouldn’t.

Three Good Reasons

Certificates of deposit are safe. They are FDIC insured up to $100,000 ($250,000 through December 2009) which makes the principal safe from loss. With the stock market as volatile as it has been the last several weeks, protection of principal is almost as important as appreciation. With the markets down double digits, earning what was once a “measly” 4% APY on a CD really looks good right now since it beats the market by a considerable margin! The best CD rates are now in the mid-4% APY range so they are at least competitive with other options.

As I mentioned earlier, the stock market is volatile and there’s certain comfort in knowing your money is safe and earning a little bit of interest. While I’m not worried about my retirement savings, as my retirement is forty years away, I would be hesitant to put any money I’d need in the next five or ten years into the stock market right now simply because it spikes and craters so easily. Would you be surprised if the market jumped 700 points? I’d be a little happy but the reality is that it might drop 700 points the next day, with seemingly no rhyme or reason. CDs? They just go up… slow and steady, but I hear that wins races.

Lastly, the rate of return isn’t bad. 4.65% APY, which was the highest CD rate as of this writing, is pretty good. It probably beats your bank’s savings account rate. If you have an online bank account, the best high yield savings account rates are pretty good too so they’re worth checking out as well. All in all, 4.65% APY isn’t 10%, the typical number used to talk about the stock market but I think you’d be hard pressed to make that argument given our environment.

Three Bad Reasons

Despite their relatively high, and safe, returns, inflation will eat your lunch. Inflation is going at a pretty good clip these days, 4.9% as of September CPI numbers, and it is the biggest problem you run into when you save with CDs. If you save at 4.65%, you’re losing 0.25% of your purchasing power each year and that’s before taking taxes into account. If you’re in the 25% tax bracket, 4.65% APY is really 3.49% APY, which means you’re losing 1.41% of your purchasing power each year. That being said, the alternatives aren’t too spectacular either.

With CDs, you’re locked into a set period of time. The shortest CDs are usually 6 months and offer the least amount of interest. The sweet spot right now appears to be the 12 month and 18 month CDs, though if you’re willing to lock it in for 60 months (5 years), you would be handsomely rewarded (in today’s terms). Fortunately with CDs, you’re totally locked in. You can often liquidate a CD if you surrender a number of months interest (often it’s 3 months, but it varies). That’s a nasty pill to swallow if you need your money though.

Finally, there are some better options if you are willing to put your money in a little bit of risk. Tax exempt money market funds are a good place to store money and get a much better rate of return. I recently looked at the Vanguard Tax Exempt Money Market and it had a tax equivalent yield of around 6% APY. It invests in municipal bonds to earn that higher interest but it’s not FDIC insured.

There you have it, three good reasons why you should and three reasons why you shouldn’t save using CDs right now. If you have any thoughts on them, maybe a point I missed, please share them in the comments.

(Photo: corrieb)


 Banking 
5
comments

Will My Bank Fail?

WaMu ATMLast Friday, two more banks failed. Meridian Bank in Eldred, IL and Main Street Bank in Northville, MI were closed by their respective regulatory agencies and their deposits were transferred to other banks. Deposits at Meridian Bank went to National Bank of Hillsboro, IL and Main Street Bank deposits went to Monroe Bank & Trust in Monroe, MI. For customers, it was no big deal as the FDIC guarantees deposits up to $250,000 through the end of 2009.

So, you might be asking yourself, will your bank join this list of failed banks? The best thing you can do help your bank fail is to withdraw your deposits right now. Banks fail because they lack the liquidity to meet their needs and pulling out funds is the easiest way to help your bank fail. IndyMac failed, in part, because billions were withdrawn when depositors learned that Sen. Charles Schumer (D-NY) wrote a letter expressing his concern over the bank’s health. It might have failed on its own, but Sen. Schumer and all the depositors hastened its failure.

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 Your Take 
2
comments

Your Take: Applaud the FDIC on WaMu & Wachovia Deals?

WaMu SucksThe bailout bill and its failure to pass the House, coupled with the 777 point fall of the Dow at the beginning of the week, has really dominated the headlines recently so it’s not surprising that not many people have focused on this bit of news – the FDIC managed to broker the sale of Washington Mutual to JPMorgan Chase and parts of Wachovia to Wells Fargo (link) Citigroup and they didn’t bankrupt themselves (or go to the government for more money).

For weeks (if not months), people have talking about how the failure of Washington Mutual, the largest thrift with $307 billion in assets, and the failure of Wachovia, who had a loan portfolio of $312 billion, would bankrupt the FDIC. The FDIC isn’t entirely off the hook though, the FDIC is backing some of the downside loss on the bad debt, but as it stands right now they managed settle two big issues without much loss.

If you’re curious as to the details of both deals, here’s an article about JPMorgan Chase acquiring WaMu assets and here’s an article about Wells Fargo buying up Wachovia’s deposits and banking business. While it still remains to be seen whether everything involving these banks is OK, it definitely two headaches off the radar for now.

Do you think we should applaud the FDIC for dodging a huge bullet (at least for now)? Or did we just shuffle the deck chairs?

(Photo: Sërch)


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