Sunday, August 19, 2007

What is the risk with getting a 1-year CD from Countrywide Bank?

If you look at the list of top interest rates for 1-year CDs at BankRate.com, you will see that the #1 top rate of 5.65% APY (5.49% simple, $10,000 minimum, Internet rate) is paid by Countrywide Bank, FSB. That sounds like a great deal. But... we all know that Countrywide Financial, the parent of the bank, is in a very precarious situation as one of the casualties of the ongoing subprime mortgage debacle, with some analysts even suggesting that bankruptcy is a very real prospect. So, does that mean you should stay away from this bank's tempting CD deal? Maybe not.

First, let me be clear that I do not at this time have a firm position as to whether investing in this CD is either a good or bad idea. I simply wish to call attention to both the upside and the downside.

On the upside:

  1. Top interest rate.
  2. FDIC guarantee.
  3. Rate is locked in for a full year, even if short-term interest rates fall if the Fed cuts interest rates as is widely expected (but not by me.)
  4. Full year of guaranteed return.
On the downside:
  1. Nagging doubt as to whether difficulties at the ailing parent could "infect" even the FDIC-protected investment.
  2. A Fed rate hike is a very real possibility once we get through the current "crisis" within a few months, making 5.65% only an average rate rather than an outstanding rate.
  3. What does the FDIC protect? Your principal and your accrued interest for sure, but are you guaranteed to get interest after the bank "goes under" as well? Unknown. Are you guaranteed to get the full, locked-in yield? Unknown. Are you guaranteed to get your cash in liquid form in exactly one year? Unknown. There doesn't appear to be any downside risk to your principal and accrued interest, but I suspect that this is about the extent of the protection. I'm making a note to check into this stuff some more, eventually.
  4. FDIC protection is only up to $100,000 for an individual at a single bank, but (bank deposits in) many retirements will be covered up to $250,000 per individual, per bank.

I myself am tempted by this opportunity, but since I am in the camp that says that the Fed could be raising rates within a few months, plus the uncertainty of how the FDIC protection actually pays out, I have to pause. Still, I am tempted.

-- Jack Krupansky

1 Comments:

At 10:25 AM EDT , Anonymous ChrisCD said...

The FDIC covers up to $100,000. If you are worried about your interest you can deposit $99,000 and have the interest sent to you monthly. If you want the compounding, discount the CD to about $94,000, so that as it compounds, the principal and interest do not go above $100K.

Also note, some accounts (such as joint) are insured above $100,000.

 

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