A question. I have some money I want to tuck away into a cd for a few months (3 to be exact). The highest rates I can find are from companies like our friends at countrywide, and fremont.
It seems strangely suspicious to me that the same companies that are in trouble are offering such high rates over the short term. Is their a relationship, could they be trying to cover their short-term debt with money that cant be touched? Given that cds are covered by the fdic (or credit union analog), what happens if these companies go belly up, would we still get our money, and interest, immediately at the termination date, or would be be hung out to dry for a while?
also, analytically, would tracking these rates for these marginal lenders be informative to their current health?
There is an almost direct correlation between CD rates and the risk a lending institution takes on. Virtually all of the lenders that offer the highest CD rates are taking on the greatest risk on the asset side of their balance sheets and are thus at higher risk of failure. That’s how it works. As a depositor you take on greater risk to get at that greater return. The only exceptions to this are that some banks run short-term specials (to drum up business) and credit unions often pay higher CD rates because they pay no corporate taxes and this allows them to subsidize their depositors (and borrowers, for that matter).
IndyMac is a high-risk lender, although not as high risk at the moment as Countrywide and Accredited, for example.
If an institution fails and the FDIC takes over, your total deposit relationship (that is, the sum of your savings, checking, CDs, etc.) is covered up to $100K. Anything above $100K is subject to loss. Joint and other accounts are considered separate for insurance purposes.
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