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Reasons Not to Take CD Paying Highest Rate?

Posted by chisue (My Page) on
Thu, Sep 11, 08 at 14:09

Today WaMu is offering a 1 yr CD @ 5% APY. I know it is in deep trouble...but FDIC will cover my amount of deposit. Please tell me why I should take a CD @ 3% at a 'better' institution.


Follow-Up Postings:

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RE: Reasons Not to Take CD Paying Highest Rate?

Did all IndyMac account holders get their money back? How long did it take?


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RE: Reasons Not to Take CD Paying Highest Rate?

chrisdoc -- I've wondered about that too. Also would like to know WHAT you get back.

Let's say I have that 1 year CD @5%, maturing in September '09. If the bank fails in March '09 do I just get my original investment back? Do I get the investment plus the 5% earned over six months? Does the FDIC guarantee the rate to maturity? (Well, probably not the latter.)


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RE: Reasons Not to Take CD Paying Highest Rate?

If a bank fails, the depositor is insured for principal and accrued interest UP TO $100,000. So if you buy a $100,000 cd and expect to earn $5000 in interest, you won't be covered for the $5000 at all. But if you bought a $95,000 cd and expect to earn that same 5% ($4750 for the full year), you'll have access to your $95,000 and whatever portion of the $4750 that's accrued as of the date of takeover.

The FDIC doesn't guarantee the rate to maturity. Everything is cut off as of the date of the FDIC takeover.

Here's a description of what happens when a bank fails.
http://www.bankrate.com/brm/news/chk/20080509-bank-failures-Q-and-A-a1.asp
But there may be different rules for internet cds because the feds justifiably are looking to protect loyal bank customers and not transient customers.

If it was my money, I wouldn't bother with WaMu at this stage of it's business life. ABC7-Chicago just reported that WaMu is looking to sell assets to stay afloat.

Here is a link that might be useful: fdic insurance


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RE: Reasons Not to Take CD Paying Highest Rate?

patser -- Thank you! Well, back to the old drawing board for where to park some funds. Not sure there will BE any funds to park if inflation continues to rise!

Promise you all won't laugh when I tell you the maturing CD's are at Countrywide (at 5.65% APY).

Does anyone know how quickly investors got their money back from FDIC? (chrisdoc's question)


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RE: Reasons Not to Take CD Paying Highest Rate?

It depends. From what's out on the internet (and thank goodness I don't have first hand experience), if you are a "regular" customer, you tend to have access to your money within 1 week, usually after just a few days. However, if you went to say Merrill Lynch and through them bought a cd from XYZ bank, you're considered to be a transient customer and it could take much longer.


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RE: Reasons Not to Take CD Paying Highest Rate?

Thanks, patser.

I see Corus is also rated one 'star' on Bankrate -- like WaMu. Our CD's are in trusts. I would be able to bring documents in to a Corus branch to open the accounts.

Or, do I have to find a bank with three or more 'stars'?


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RE: Reasons Not to Take CD Paying Highest Rate?

I would research the basic business of bank you are interested in...in this case Corus and then make a decision accordingly.

In general, I think it's pretty safe to assume that a bank paying super high rates when compared to it's competitors is a bank that is having problems raising it's funding.


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RE: Reasons Not to Take CD Paying Highest Rate?

patser -- Thanks for patiently answering my questions. We took the risk with Countrywide after Bank of America claimed it. Just because *that* worked out OK doesn't mean we should get involved with a WaMu or Corus.

It's frustrating trying to find 'safe parking' that pays more than a pittance.


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RE: Reasons Not to Take CD Paying Highest Rate?

ING is paying 4% for 1-year CDs.


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RE: Reasons Not to Take CD Paying Highest Rate?

If it were me, I'd have alot more peace of mind with ING than Corus. Corus is getting the whammy now because it's main business is commercial real estate, and their earnings haven't been so hot the last couple of quarters.

Another idea - why not look at buying a 1 year Aaa rated corporate bond?


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RE: Reasons Not to Take CD Paying Highest Rate?

If your CD is in the name of a revocable trust this is what the FDIS says about the insurance:

"If all of the beneficiaries are qualifying and have equal interests, the insurance coverage for each owner is calculated by multiplying $100,000 times the number of qualifying beneficiaries, not $100,000 times the number of owners plus the number of beneficiaries."

So you could have a CD well over $100,000. and still be covered by the FDIC. It all depends on how many qualifying beneficiaries you have in your trust.

Our estate attorney referred us to our CPA to explain all of this. I believe what he says and looked on the FDIC wed site but I still dont what to ever find out firsthand how it all works

If its an irrevocable trust the insurance is quite different. Go to the FDIC site and look under Your Insured Deposits ownership categories you can see the difference.

With interest rated down so low at this point the coffee can under the rose bush may be the better option.


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RE: Reasons Not to Take CD Paying Highest Rate?

I found this thread fascinating. There was a time, not so long ago, when nobody ever thought about the safety of their money in a CD and never considered the issue of the bank's solvency and the chances of getting their money back. Time really have changed.

I would suggest another place to park money at minimal risk: A money market mutual fund with one of the big 3 -- Fidelity, Vanguard or T Rowe Price. It may not pay as much as a CD (but sometimes may pay more), and it is not FDIC insured. But it is managed in such a way as to safeguard the principle, so that each share is always kept at the nominal $1.00. A loss of principle, which they call "breaking the buck" is a real no-no, it's conservatively invested to prevent that. The advantage of these instruments is that you do not lock in an interest rate -- the rate is adjusted periodically -- I think once a week -- in response to prevailing conditions. So if interest rates are going up, which they generally do when inflation is rising, you'll earn a little more.

The other alternative, for individuals in a high tax bracket, is a municipal money market mutual fund. It pays less interest that the taxable version and you have to do the numbers for your particular situation to figure out whether the taxable or tax-free makes sense for you.

Lately, some analysts have been unenthusiastic about municipal bonds, which are federal and state income tax free, if you live in the state that issued the bonds -- the reason: a lot of state governments are in financial trouble lately because of the economic downturn and some may not be able to meet their obligations. Although munis are usually considered safe investments long-term, a tax-free money market fund, which invests in short-term munis and other tax-free instruments and is broadly diversified, is a safer alternative.


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