Brokered CDs: screening the issuing institution?

[jazz4cash]

I would consider buying a callable CD. It depends on the terms. It's not a black or white issue for me.

 

[JohnnyBGoode]

I did a couple of CD ladders with Fidelity a year or two ago. The tool Fido has on their website is quite good, but it felt a bit weird picking CD's where all you had (in some cases) were bank names you had never heard of. (FWIW, I skipped the "Bank of China" offering)

When it came time to re-up, I looked at the rates I could get at Fidelity and decided I'd rather buy my next set of CD's at Ally. The rates are almost the same (especially for less than a 2-year maturity, which is what I was looking at) and I just felt like I had more control/transparency.

For me, I like the simplicity of the Ally approach and it isn't hard to build your own ladder there manually (I saw a ladder tool on the site recently but couldn't find it now when I just looked - it wasn't that great anyway as there just isn't that much to choose from). Yes, maybe a lose 0.1% or 0.2%, but worth it for me.

That all being said, if you are looking at a 3+ year time horizon for CD's then the Ally rates can't keep up. But 1-2 years seemed like a nice sweet spot.

 

[jetpack]

Buy on the secondary market below face value. Then you'll make money if the bank goes under!

 

[pb4uski]

If you buy below face value you'll make money either way... if the bank goes under or not.

 

[njhowie]

But the sooner it goes under, the higher your effective yield.

 

[pb4uski]

Then it is a good thing that banks rarely go under.

 

[brucethebroker]

Yep UBetcha! WFC knows how to treat customers. Seriously they were top notch before they lost their way. They seem to have the best rates for most maturities on the Fido site and pay monthly. While I favor well known banks I rely more on FDIC and diversification.

Yeah, interesting current ads/marketing push "we know we blew it, but we promise not to do it again-we want you back." I personally feel like the guys who recently got caught are a better risk than the crooks who have not been caught, yet. At least for the foreseeable future....

 

[MichaelB]

Banks go under all the time. It usually not a newsworthy event, because the regulators manage the process so well. They bring in another bank to assume the portfolio, so protected account holders only see a name change.

 

[Another Reader]

Bought CD's from Wachovia and Countrywide banks back in 2008 I think. They were desperate and paid above market rates. Some nice yields on 4 and 5 year CD's IIRC. Both banks failed, as I expected, and I ended up with Wells Fargo (took over Wachovia) and Bank of America (took over Countrywide) CD's at a very nice yield. I was sorry when they matured and I wish in retrospect I had bought a lot more.

 

[Spock]

ok... the general gist is "if its FDIC its good to go" with a little aversion based on bank name.

So... do you trust what the brokers website/tool says about it being FDIC or do you look up the issuing bank to confirm its covered by FDIC?

(FWIW, I had one major bank that I was about to open an account with but found that it did not have a registration number with the FDIC when searching the FDIC db. The bank pointed to a completely different named institution claiming they were covered by their parent companies FDIC registration... i passed.)

 

[pb4uski]

^^^ That would spook me too. (Pun intended).

 

[audreyh1]

ok... the general gist is "if its FDIC its good to go" with a little aversion based on bank name.

So... do you trust what the brokers website/tool says about it being FDIC or do you look up the issuing bank to confirm its covered by FDIC?

(FWIW, I had one major bank that I was about to open an account with but found that it did not have a registration number with the FDIC when searching the FDIC db. The bank pointed to a completely different named institution claiming they were covered by their parent companies FDIC registration... i passed.)

Seriously? Wow!

 

[brewer12345]

Generally the brokers do a bunch of due diligence on the cds they broker. If I bought a CD labelled as insured and it turned out not to be, I doubt I would even have to sue to get the money from the broker.

 

[njhowie]

Generally the brokers do a bunch of due diligence on the cds they broker. If I bought a CD labelled as insured and it turned out not to be, I doubt I would even have to sue to get the money from the broker.

Absolutely. Generally all brokered CDs are FDIC insured. On Fidelity's website it has an explicit statement, and on the CD details page there is an entry for FDIC Insured which is Yes/No - I've never seen No. On Etrade, on the CD details page they provide the bank's FDIC number - it's always filled in. I have seen only one case over the years on Etrade's site where a CD was not FDIC insured, and in the listing heading in big bold print it specifically said NOT FDIC INSURED.


This is the heading on Fidelity's secondary market CD page:

All brokered CDs listed below are FDIC-insured as indicated by the Attribute: FDIC. The FDIC insurance covers up to $250,000 per institution per category of account, or up to $250,000 in qualifying retirement accounts. Note that FDIC insurance only covers the principal amount of the CD and any accrued interest. In some instances, CD's may be purchased on the secondary market at a price which reflects a premium to their principal value. This premium is ineligible for FDIC insurance.

 

[brewer12345]

I would add that there is a regulation on the books that says the moment a bank drops below the regulatory definition of well capitalized they are not allowed to issue brokered cds. This means if you buy new issue brokered cds you will not be dealing with a bank in trouble.

 

[njhowie]

I don't see where this question was answered. Bankrate.com can tell you about CDs on offer. Bauerfinancial.com rates the institutions (banks or credit unions) based on their financial reporting to the federal government.
4 or 5 stars are recommended, anything else means there may be financial problems.

bauerfinancial is an excellent resource. However, Bank of China, Bank of India, and other foreign banks which do have FDIC backing their CDs are not covered by Bauer. I've tried looking them up in the past and just now unsuccessfully.

 

[njhowie]

I would consider buying a callable CD. It depends on the terms. It's not a black or white issue for me.

Absolutely.

This past Friday I purchased a 5-year 3.4% callable CD, callable starting 6 months from now. Worst case they call it early and I've made more than the shorter term CD is offering today.

 

[brewer12345]

I may shortly be opening an account at Red neck Bank. Slogan: where bankins funner. Aside from the appeal of being a debit card carrying redneck, they offer 2% on a money market.

 

[pb4uski]

Vanguard's Prime MM is currently paying ~2% as well and for me that is easier.

 

[audreyh1]

Hah - well I discovered something today looking at Fidelity's new issue CD offerings:

All of the foreign bank subsidiary offerings are not available to me in TX. Under "SKY" in the "Attributes" column, TX is one of the state listed as not available due to Blue Sky Restrictions. MT and OH are other states sometimes listed.

So even if I wanted to, not an option.

 

[njhowie]

You're not missing anything.

A year or two ago, when short-term rates were still well below 1%, the extra 0.05% of these CDs made a difference. Today, with short-term rates significantly higher, the 0.05% difference is almost nothing - you could easily make that up from a US-based bank by taking the term a month or two longer.

 

[Another Reader]

California is a Blue Sky state as well. Not missing that much yield and there are probably some reasons to avoid those banks anyway.