Dedicated to Deposits: Deals, Data, and Discussion

Lessons from the Stanford Financial Mess and Foreign CD Options

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EverBank
As I was reading the newspapers this morning I came across this Houston Chronicle article which reports on the court-appointed receiver in the Stanford Financial mess. I'm afraid it doesn't look good for those who invested in Stanford CDs. According to the article, "So far, they've found a fraction of more than $7 billion purportedly in Stanford CDs."

As CD rates at US banks continue to fall, high-rate CDs from foreign banks may start to look more appealing. As I mentioned in my first post on Stanford, foreign banks have been advertising high CD rates in the US for years. One of these banks that has been around for a long time is Millennium Bank that's based in St. Vincent. I first researched this bank in October 2005. After Stanford made news, the media has started to investigate Millennium Bank. This BusinessWeek article asks if Millennium Bank is too good to be true, and this recent MarketWatch commentary considers these CDs to be the "stupid investment of the week."

Determining the safety and soundness of foreign banks can be very difficult. As we learned with Madoff's investments, things can go well for investors for many years before major problems arise. Many of these foreign banks have some regulatory oversight by foreign governments, but it's difficult to know the extent of the oversight. That's why I stick with US banks and credit unions which are regulated by state and/or US federal agencies.

If you see a website advertising a very high rate on a certificate of deposit or some other bank-like account, you should first determine if the website is from a FDIC or NCUA insured institution. Both FDIC and NCUA are agencies of the US federal government. FDIC covers banks and NCUA covers credit unions. I have more details in this 2007 post on verifying FDIC or NCUA membership. I also discuss the benefits of FDIC and NCUA membership. It's more than just deposit insurance.

Alternatives to Foreign Certificates of Deposit

For those who are pessimistic about the US dollar, there are some US Banks that offer alternatives to the traditional CD. One that offers alternatives is EverBank. In addition to traditional CDs, EverBank also offers World Currency CDs. These can provide high rates along with appreciation when the dollar falls. However, there is also the risk of a loss of principal due to changes in currency exchange rates. I described many details of these Currency CDs in this 2007 EverBank post which included an interview with an EverBank VP.

These CDs appeared very appealing until the financial crisis spread outside the US. The CD rates varied by country, and one of the countries that had the highest rate was Iceland. The risk/reward principle hit home on this one. Iceland's financial crisis appears to have caused these CDs to experience a major loss. Hans at OpenMarket described the loss he experienced and how it seemed to be more than what should have been expected.

EverBank still does offer attractive rates on 3-month World Currency CDs. Here are the three best listed at EverBank's rate table as of 3/22/09:
  • 6.75% - Brazilian real
  • 5.25% - Indian rupee
  • 7.75% - South African rand
The above countries are much larger than Iceland so I would think there would be less chance of experiencing the loss that investors experienced with Iceland CDs. But you could still lose money due to changes in currency exchange rates.

One note about these CDs is that there is a 1% currency conversion rate that will cut into the returns. However, if you let the CDs automatically renew, there is no conversion fee. So this fee shouldn't have a major impact if you use these CDs as more of a longer-term investment.

Related Pages: CD rates, EverBank

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Comments
3 Comments.
Comment #1 by DataIsGold (anonymous) posted on
DataIsGold
I might also suggest CurrencyShares.com you can purchase various foreign currencies with a stock broker. For me it's an alternative to Forex accounts which pay little if any interest. More control over the asset than Everbank's CurrencyCDs. Just a thought for those willing to invest in such equities.

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Comment #2 by bob at dollar and dollar . com (anonymous) posted on
bob at dollar and dollar . com
Is Everbank CD offering of various foreign currencies is FDIC insured?

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Comment #3 by Banking Guy (anonymous) posted on
Banking Guy
Here is what EverBank states regarding the FDIC insurance:

"While FDIC insurance will protect you from bank failure up to $250,000 (through December 31, 2009), currency values can be affected by various geopolitical and economic influences and this can negatively and positively impact the amount of your deposit."

In short, your principal is not guaranteed.

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