The FOMC (Federal Open Market Committee) finished their January meetings this week. They usually meet every six weeks and outside of a sudden change that affects the economy they won’t meet again until March. Of particular interest to savers is the commitment to keep rates low, well into 2014. Their goal is to keep borrowing rates low to spur on lending and improve the economy. For people seeking loans this is great news. For people living off of savings and fixed income savings it is awful. There has got to be a better way. Matter of fact, continuing to encourage debt over savings just shows our wonderful leaders didn’t learn anything these last few years. They are also encouraging greater risk taking for the savers because they will be tempted to seek yield which often leads to making poor investment decisions.

I am working on an article about volatility in a portfolio versus consistency. Hopefully that may help a few from seeking too high risk/yielding investment vehicles. Two months ago I personally put some funds into a 10-year CD through my brokerage account. I just felt for me, I would rather have the guarantee than the stress of worrying about the ups and downs in the market. My own portfolio is made up of a few CDs, and four ETFs (US Broad Index, REIT, Short-term Treasuries, and TIPS).

When it comes to CD rates expect the rates to fall further and the curve to flatten. Their is still a bit of spread between the short-term and long-term CDs, but I don’t think it will last too much longer. 1-year CDs will slide closer to 0.25% and 5-year CDs probably below 1.00%. Institutional CD Rates have already been in the low 1.00%’s. I’m guessing the time frame would be over the next 6-months. If you just aren’t sure about locking your rates in for the long-term, then put some short and some long. Pentagon (NCUA insured) has one of the top 1-year rates out there at 1.16% and a 7-year CD at 2.75%. They typically change rates once a month. However, this maybe one of those times they don’t wait. If you have some excess funds take a look at them.

What are your thoughts? Would enjoy some dialog.

cd :O)

I apologize for the image, I just couldn’t help myself when I saw it. Don’t worry, the aliens aren’t coming and you don’t need to flee to the hills. As the title indicates, “Stay the Course!”

Panic is never a good thing. It often leads us to making rash decisions that we regret later. The stock market is volatile by nature. It will go down, back-up, down again, and back-up yet again. History shows that you have a high probability of coming out ahead if you stay the course. I’m not telling you to never sell a stock or that it is never the right time to move out of an ETF. What I am telling you is do your homework. Research your decision before you make it.

What I would say is find your governmental representatives office and demand “Take me to your leader!”. Sit down and have a nice chat with them. Let them know that just like you have make hard choices when your income drops (no cable, no new car, sell the boat, etc.) you expect them to do the same. The money isn’t there. Things have to be cut. And they should start with themselves. Maybe they can go out and get a 2001 Honda Accord instead of a 2012 Cadillac Escalade.

I realize I am a CD guy. So I included a link to some rates from Aurora at the top. At a different institution, we still have a 10-year at 3.35% APR / 3.40% APY. It has a 1-year early withdrawal penalty. If closed after 2-years, you would net 1.47% and after 3-years you would net 2.13%. There is a fee for this CD, but all rates are quoted net of fees. With the Fed indicating they will keep rates low into 2013, this just seems like a good CD. You get income now and have a reasonable hedge against rising interest rates.

Feel free to leave any comments.
cd :O)

Image: africa / FreeDigitalPhotos.net

Note: This was originally going to be released before the year end, but another topic (Main Street Bank)took my time away.

2010 is done. I thought I would do a post and give some of my perspective on last year and what could happen in 2011. I don’t have a crystal ball so I could be way off. I would love to read your thoughts (as I’m sure others would, too) so please leave yours in the comments section.

Looking Back – 2010
In 2010 there were 157 bank closures and 18 credit union closures. There are still some banks exhibiting extreme weakness, but for the most part, the pace of closures should drastically slow down for 2011.

[Side note:] It has taken me so long to complete this post that I have to revise the above. A quote from our friend at Deposit Accounts makes me wonder if in 2011 we could see a lot of bank closures.

In the FDIC’s 2009 Third Quarter report, it listed the number of problem banks at 552. In its 2010 Third Quarter report, the number has increased to 860.

Sadly, it seems that the “too big to fail” institutions are even bigger. I do believe in free markets, but the markets were not allowed to separate the chaff from the wheat. Institutions that pose a systematic risk should be broken down into smaller pieces. In my opinion all of the various stimulus measures have just prolonged true recovery. A Home Tax Credit early in the year boosted home sales temporarily, but now that the credit has long expired, home prices are falling again. The fact is that home prices need to fall in-line with what the economy and proper risk analysis can accommodate.

The Fed held overnight rates near 0% for the entire year. This has caused CD rates to steadily drift down. In the beginning of the year there were still 2%, 1-year CD rates out there. But, now you are lucky if you can find anything above 1.00%. 5-year CD rates were in the high 3.00% range and now they are around 2.00%. Recent increases in Treasury yields have caused some upwards pressure, but I don’t expect those levels to hold past January of 2011. Throughout the year, the difference between the short-term and long-term rates has been quite pronounced. For those with longer-term ladders or those that are willing to deal with an early withdrawal penalty, the pick-up in income is quite good.

The FDIC has basically been at war with brokered deposits. They levied an assessment of 20 Basis Points (0.20%) in the late spring. This has caused more and more banks to go looking towards rate services for deposits and avoid being under scrutiny. The ultimate problem with this is the FDIC really doesn’t have a handle on the mix of deposits that banks are carrying. Now, I don’t believe brokered deposits are the problem, but by basically allowing banks to hide them, many bank closures have been more expensive than necessary.

Official unemployment has remained close to 10% (today it was 9.4%), however, when those who have given up looking or are only able to work part-time is factored back in, the percentage is closer to 17%. Given a rate that is about 2 1/2 times greater than the Fed likes to see they have tried various methods to encourage investments into people. But so far, those efforts haven’t produced much success. I think most companies are just too leery of expanding with the uncertainties they are facing (think healthcare, taxes, and regulations).

Looking Forward – 2011
I don’t see the real economy changing much in the first half of the year. We are already seeing higher gas prices and home heating costs. Those dollars will help keep local gas stations and utility companies in business, but stores that market the non-essentials will still most likely struggle through the year.

Everyday, you hear about the stock market roaring ahead, but I don’t see that it is based on any true data. Just lots of hot air. With the Fed still basically handing out free money to institutions, they are hedging their bets on longer term, “higher” yielding assets. It seems that some very dangerous bubbles are appearing.

If you have funds to play with, real estate could be great for you. Prices are expected to fall more and in many areas they are already down 30% to 50%. I’m not in the extra funds area, so don’t ask me where the deals are.

The web seems poised for another run. But, I just worry about too much over valuation. Facebook has been valued at $50 Billion dollars, but all they have is advertising (at this point). Google still controls search and most still go there for their digital inquiries. Another problem is the speed of innovation (and downturns). Companies can rise and fall so quickly. Take Groupon. They rebuffed Google’s $5BB offer and now Google is looking at creating a similar service. That could drastically alter Groupon’s revenue.

Finally, what about CD and savings rates? I don’t see much changing. There is still just too much money in the system and too few “qualified” people seeking loans. Banks are taking a much harder look at who they loan to these days. I suspect that as the Fed increases rates (late 2011 for the optimists / sometime in 2012 for the less so) that there could be some flattening of the yield curve. This means that the difference between the rates on the different terms could shrink. Right now we have average 1-year CDs around 1.00% and 5-year around 2.00%. I suspect the longer-term rates will rise more slowly than the short-term. Ultimately this will depend on how well people think the Fed can control inflation.

So what do you think? Leave your comments below.
cd :O)

Image by: by Frits Ahlefeldt

Sometimes, enough is enough. We’ve tried talking to you, but you don’t want to listen. We tried talking to your supervisor (the FDIC), but they don’t seem to care. So we are left with very few options.

On late December 24th, you sent a notice that you were canceling some of your certificates of deposit. You claim the FDIC ordered you to do so, but we have yet to see actual proof of this. You hang your hat on a clause in your disclosures that reads, “We may also close this account at any time upon reasonable notice to you and tender of the account balance personally or by mail.” First problem, sending a notice on the same day that you send a wire isn’t reasonable. Second problem, a CD is not a typical deposit account. A CD is a time deposit with a contractual term and rate. You may have the right to close the account, but you are obligated to pay the interest through the maturity date. That is the agreement you made with each of these CD account holders. Anything less, is a travesty, unimaginable act of bad will, and most of all, you are breaking your word.

So Main Street Bank located in Kingwood, TX, I’m calling you out. I’m giving notice to you and any future customers of yours, that your word is worth less than the paper it is printed on. Anyone that considers opening a future CD or any other account with you will hopefully shop with a different bank or even better yet look to a credit union. No wonder people don’t trust banks.

You see, the depositor had other options at the time that they opened their Certifcate of Deposit. You have robbed them of the interest that you promised them for the original term of the CD. If you had any honor, you would immediately wire the remaining interest that you owe. And not only did they trust you, but so did we. Shame on you. And shame on the FDIC for not doing their duty (and believe me this isn’t the first time) to protect depositors from unscrupulous banks that hide behind small print.

No reasonable depositor expects that a bank can just up and close their CD without paying all interest. Historically, the only exception to this has been when the FDIC closes the bank.

Main Street Bank of Kingwood, Texas, I will gladly retract this post, just pay the depositors what is due to them. Just be honorable.

Update: A comment below asked to see the letter that was sent out. Here is the letter with the appropriately redacted information. View letter And to be clear, it wasn’t just one CD. It was 14 CDs that totaled about $1.4MM. Lost interest is about $32K. So a fairly decent chunk of change. Also, although the letter references a consent order from the FDIC, the only thing the consent order mandated was that they shrink in size. The bank came up with the plan to do it. And the bank unfairly closed a set of CDs with out properly compensating the CD holders.
cd :O)

We have added a new section to our website to focus on our CD service for business and institutional clients.

We have been in the CD Placement business for almost twenty years. Our clients include public entities, trust departments, corporations, banks, credit unions, associations, etc. We track CD rates at over 100 institutions daily.

We help Millions of dollars find safe, secure FDIC insured banks everyday.

Most money managers have enough on their plate without having to try to find acceptable CD Rates. Anyone who has tried to find enough FDIC insured banks to cover a million dollars, knows what I am talking about. First you call your local banks. Most of them have enough money and/or are paying rates around 0.20%. Then you find a site like bankrate.com. They have lots of good rates, but most of them only what funds from individuals. After making a bunch of fruitless calls, you are wondering, “Can it be this hard?” Yes, it can.

Let us help you get back to business.

Check out: Business CD Rates

cd :O)

Top 5 IRA CD Rates

Sometimes I hate being right. I am often asked for a Certificate of Deposit rate forecast and last week I made a doozy. Unfortunately, it seems to be coming true.

I predicted that 1-year CD rates would be heading towards 0.50% and 5-year CDs down to 1.50%. When you remove the top players, we are quickly approaching those numbers. Which also means that the top players are likely to begin going down.

Institutional jumbo CD investors are especially hard hit. The top player such as Alliant Federal Credit Union still has a 1.75% APY for 1-year, but it isn’t available for institutional CD buyers. And once you have $250,000 of personal funds with them you have to move on down the list. The average for the top 10 and top 20 certificate of deposit rates is quickly decreasing.

As with any investment vehicle, those who try to time the market generally don’t fare so well. That is why I believe long-term CDs with low penalties are a good option. You get some better yield now and have a fixed cost to close if rates go up anytime soon. However, rates rising anytime soon doesn’t seem likely.

If you have jumbo investment needs, give us a jingle and we’ll let you know what we can do.

Some Rates To Consider

Sorry that I didn’t get this out sooner. On Wednesday, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. This was touted as the largest set of financial reforms since The Great Depression. Only time will tell if that is true or not.

The good news is that tucked into the bill was making the $250,000 FDIC insurance limit permanent. For those with larger amounts, you at least don’t need to worry about watching maturity dates any longer. A husband and wife can now have up to $1 Million insured at one bank. If they add beneficiaries and POD accounts it can be substantially more.

Another bit of good news for many was that the bill made the $250,000 limit retroactive to January 1, 2008. This means that many investors who found themselves over insured at ANB Financial and IndyMac when they failed will recoup much if not all of their losses. This is being handled automatically and we were told by the FDIC that people should be receiving checks within 7 to 10-Days. One problem may be for those that have moved. The FDIC will be using the address on record at the time of the failure. So if you have moved, I would contact the FDIC and see how you can recover your funds.

My family took a big summer trip. What have you been up to this summer? Leave a comment and let me know.

Have a great day,
cd :O)

This is pretty exciting news. A story in MarketWatch mentioned that a House Panel has voted 12 to 7 to make the $250,000 FDIC insurance limit permanent. In addition, it would make it retroactive to January 1, 2008. This would certainly help people who lost funds in the ANB Failure in May of 2008 and IndyMac failure of 2008. There were many stories of people being bit by not having POD accounts properly set-up. So this move would help them out. On the other hand, with the FDIC insurance fund already in the red, I wonder what kind of extra burden that will place on the system.

The provision is part of a larger bill to consolidate the Office of Thrift Supervision and Office of Comptroller of the Currency. Now the entire bill will go to the House. If it passes the House, the Senate will vote on it. If it passes and it doesn’t need revisions it will go for signing by President Obama. I’m not sure what else is in the bill, so it may be good to read through it before urging passage, but on the surface it would be helpful.

Even to this day, people are unaware that the current $250,000 limit is temporary and set to expire after 12/31/13. Many people don’t realize the limit is temporary and have been doing long term CDs without paying attention to the maturity dates. So passage would certainly remove confusion.

Certificate of Deposit Rates

The FDIC has basically established a national rate for CDs. You’ll find it quite difficult to find any bank offering above 1.60% for 1-year CDs. You may be wondering why. Starting January 1, 2010, under capitalized banks have to set rates at or below the Weekly rates that the FDIC publishes. Here is a link.

What is interesting that even healthy banks are deciding to follow the rate cap. I guess they figure if the FDIC thinks that is a “good” level they might as well fall in place. Many are even offering lower rates. We have even heard of some pressure from bank examiners telling banks, healthy or not, that they shouldn’t be paying rates higher than the cap.

Honestly, when the law was passed I didn’t really see this as the outcome. I thought it might make it harder for the unhealthy banks to raise deposits and thus decrease potential losses if the bank fails. I see the opposite happening. With many healthy banks posting lower rates, the unhealthy banks are still able to easily bring in deposits.

Regardless it is very frustrating to see the government stepping in so strongly to basically regulate the rates that banks pay. It is also interesting to note that although banks haven’t strayed too far from the posted CD rates, many are still out there with high yield savings and checking account specials.

Another interesting development is to see banks work around the caps with creative penalties. For instance we have seen a couple of banks offer 2-Year rates with a zero penalty after 1-year. That effectively allows them to use the higher 2-year rate for a 1-year CD. Also goes to show you that creativity can “trump” governmental restrictions. Also goes to show you that governmental restrictions are rarely thought out well enough and often have the opposite effect of what was hoped or intended.

Two good notes. Credit Unions are not regulated by the FDIC and thus have no rate cap. There are still a few out there posting 2% or above for 1-year CDs. Secondly, there is a bank with a 2Y at 2.53% APY with a 1x bump and a 3Y at 2.79% APY with a 2x bump. Shoot a message and use the magic words, “Awesome Rates” and I’ll give you a 20% discount from our normal fee.

[Update 3/11/10: The 2Y bump rate dropped to 1.88% and the 3Y dropped to 2.21%. At this point a 5-year with a low closure penalty may be the best option]

Have a great weekend.
cd :O)

Many people don’t worry about the capitalization of a bank. However, it is a good harbinger of distress and if not corrected early and quickly, many under capitalized banks fail. Under capitalized banks are able to use a rate listing service to attract certificate of deposits (CDs). As it appears that no one is policing the rate listing services, banks are able to offer rates significantly above the new Rate Cap that the FDIC has put into place. Although, the law doesn’t go into effect until January 1, 2010, the FDIC has encouraged voluntary cooperation. From what I’m seeing, under capitalized banks aren’t cooperating. I have a serious problem with the law that allows banks (under or well capitalized) through a rate listing service to attract deposits and classify them as a core deposit. Anybody with any sense and logic can see that clearly, deposits placed through a rate listing service are not core.

This poses a few problems. First, rate listing services and companies such as ours are basically doing the same thing. We help banks, often times community banks, raise direct deposits to meet their funding needs. For various reasons, deposits such as ours are more attractive than local deposits. Ours may be less expensive, easier to work with, faster to obtain, etc. Those reasons aren’t really part of this post. If Credit Union A purchases a direct CD from me to go into Bank B, it is a brokered deposit. If Credit Union A purchases a direct CD from the rate listing service to go into Bank B, it is not a brokered deposit. It is the same money, the same bank. Everything is the same except for the middle man (or middle listing service). This leads to the second problem. Banks are now using rate listing services to avoid paying the new FDIC assessment on brokered deposits. I can’t really blame the banks for doing this. After all, the law allows them to. But if the FDIC’s concern is that out-of-area deposits pose more of a risk to the bank, then all out-of-area deposits should be properly supervised, managed, and assessed if appropriate.

Another problem (the meat of this post) is under capitalized banks are not allowed to take brokered deposits without a waiver from the FDIC. This is supposed to prevent unhealthy banks from running up their deposits and costing the FDIC even more money. These deposits also can cause a bank to be less valuable to potential acquirers and thus costing the FDIC money. An under capitalized bank is able to take non-core deposits from a rate listing service without a second glance. The rates they are offering are supposed to be at or below the rate cap that the FDIC has published. It appears that no one is policing this. At a minimum, rate listing services should have to build into their programs rate restrictions on under capitalized banks. Below are a couple of examples of current under capitalized banks offering high rates on a rate listing service and attracting deposits.

I’m not going to put the names because I don’t really want to cause problems for the banks. Bank A is currently under capitalized with a Total Risk Based Capital Ratio (RR) of around 5.5%. This needs to be 10% to be considered well capitalized. Their capital ratio is just over 2%. Generally, regulators like to see a 7% or above. The numbers reported on the June Call report are even worse. This bank is currently accepting deposits through a rate listing service with some of the top rates in the country. The rate cap established by the FDIC is 2.93% for a 5-year CD. They are offering around a 3.40%.

Bank B is also currently under capitalized. They have a RR of 6.9%. The capital ratio is 4.6%. These are quite low. This bank is also currently accepting deposits through a rate listing service. Their 1-year CD is around 2.00%. That is higher than many internet specials. The rate cap in place by the FDIC is 1.87%.

I could give numerous other examples. But, I would also like to point out some banks that have failed. These I can name since they have already been closed.

First conclusion: Bank A and Bank B that are currently accepting non-Core deposits are likely to fail soon. Their current ratios are in the same range as the above listed recent bank failures. Second Conclusion: only one of the above listed banks had a significant amount of reported brokered funds. However, all of the above banks at various times could be found on a rate listing service attracting deposits; some of them, within weeks of their failure. Millennium is one of the most interesting. They had $0 reported for brokered deposits, but they took in millions of dollars from rate listing services. [Side note: Union Bank, NA out of Arizona was closed by the FDIC on Friday, 8/14/09. Their RR as of 3/09 was just about 6%. Also on rate listing services quite often.]

Personally, I don’t buy the argument that brokered and/or non-core deposits cause bank failures. But, as a bank is falling into the abyss you will see them quite often offering high interest CDs or savings accounts through the internet (Washington Mutual, IndyMac) or on a rate listing service. The additional deposits didn’t cause the failure, but they certainly make it more expensive for the FDIC and ultimately us, the taxpayers. Since, the FDIC is currently assessing the brokered deposits that banks hold (based on a formula), shouldn’t they also assess non-Core deposits that in reality are the same type of funds? I think you know my answer. What is yours?

I realize my opinion probably won’t be very popular with banks, especially those on the rate listing services. But, I ask you, do you want to have to compete with the high rates being offered by banks such as those listed above? I also ask you to consider what is the intent of the law when it comes to accepting such deposits. The intent of the law is that banks do their due diligence when accepting out-of-area/non-core deposits. Rate listing services currently allow banks to disregard that step.