Saturday, April 25, 2009

Great Rates: For a Reason?

The other day, I saw an advertisement for "Great CD Rates." Immediately, I was skeptical. Great CD Rates in this economy? Our bank is offering 1.50 percent APY, and I certainly don't think that is "great." Could there really be much difference between my bank and the one down the street?

Fighting my skepticism, I followed the link to investigate what was so great. I was led to a page that advertised the highest CD rates in all the land. For a two-year CD, there were seven banks who were offering 2.75 percent APY or more. I could not believe my eyes!

If you're not good with percentages, this is a huge difference. Over a two-year span, starting an account with $10,000, the difference between 1.50 and 2.75 is around 250 dollars. Is it really possible that one bank thinks my money is worth $250 more than another bank? The $250 premium these banks were offering was almost the entire interest payment ($300) offered by my bank.

My search through those pages on CD rates reminded me of a famous joke about economists:

An economist and his wife are walking down the street. His wife stops him and points at a $20 bill laying on the ground. "Do you see that $20 bill?" she says. The economist laughs and says "That can't be there! If it were, someone would have already picked it up."
This joke captures the typical economist's firm belief that there won't be free money laying around in an economy. Economists call this the no arbitrage condition. The joke sounds absurd, but when you study something like an economy (where nothing is as it seems), sometimes an analyst cannot trust his eyes.

When I was staring at the screen with these interest rates, I felt like I was staring at 12.5 twenty dollar bills. It was very much like a Geiko commerical! I was tempted to transfer my whole bank account balance to one of these banks. But, I could not believe it. I had to be convinced that these banks were legitimate.

First, I checked to see if they were FDIC insured. All but one (State Bank of India) were FDIC insured. Does that settle it? For the remaining six banks, I still couldn't believe it. There had to be a good reason why these banks were offering such high rates. And, silly economist me -- I had to investigate further.

Two of the remaining six banks had been in the news: GMAC Bank and Discover Bank. They had been bailed out! GMAC has received $6 billion, whereas Discover has received $1.2 billion. Is this a sign of good management? You may say that the government gets some say in their operations now. I repeat. Is this a sign of good management? I crossed these two off the list.

One of the remaining four banks is called Intervest National Bank. I looked it up. Judge for yourself, but I would not put my money there. Maybe they're saving on costs, but their signal is no good.

The remaining three banks are all online banks that are subsidiaries of some other, more recognizable bank.

First, there is UFBDirect.com, which is a subsidiary of Waterfield Bank. I had never heard of Waterfield Bank, so I searched further. I found that they recently changed their name from American Partners Bank to shed themselves of the reputation that came with an "unusual history."

Next, there's UmbrellaBank.com, which is affiliated with New South Federal Savings Bank, the sixth largest bank in Alabama. A Google search for "What's wrong with 'New South Federal Savings Bank'" did not uncover any skeletons.

Lastly, there's NewDominionDirect.com. I could not trace their bricks-and-mortar affiliation, nor could I establish that there were any skeletons in their closet.

When you find a basket of seven apples where the first five have worms, you have to wonder about what's wrong with the other two. The fact that the best looking apples after my investigation are named UmbrellaBank.com and NewDominionDirect.com also does not reassure me.

Maybe there is a reason for these "Great Rates" after all.

1 comment:

  1. Thought I'd give commenting a second shot, Tony. I'm brief in the off chance that it falters.

    So exciting to see you launch your blog.
    Katie

    ReplyDelete

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