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High Deposit Rates and Banks' Narrowing Margins


This Wall Street Journal article describes another issue in addition to the credit crunch that's hurting banks. Competition for deposits among banks remains intense, and this is reducing the interest margins between banks' loan and deposit rates. The most affected are small and midsize banks which tend to rely on this for much of their profits. Larger banks can derive more income from other areas like investment banking.

The article mentioned both Countrywide and E*Trade as two banks that have been hit hard by the credit crunch but are still offering some of the highest savings and CD rates. This puts pressure on other banks. I just saw an example of this when a reader recently emailed me that he was able to get a WaMu branch manager to match Countrywide's 5.50% 6-month CD.

The article didn't mention how the internet is helping to put pressure on banks to keep deposit rates high. With the information on the internet combined with how the internet can make it easy to move money, banks are going to have to compete for our money.

Thanks to the reader who mentioned this article in the comments.

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Anonymous   |     |   Comment #1
interesting about the wamu remark; i made the same request at the san francisco branch vs. countrywide and they wouldn't match it about a month ago so i took my money out.
Anonymous   |     |   Comment #2
same here.
Anonymous   |     |   Comment #3
Countrywide stock down about 20% to about $6.00 per share. Wall street rumor they are going under. I have 95,000 there. Most in CD"S. What does everybody think should I cash in now or wait until FDIC takes it over. This dumb old man would be interested in any comments.
Anonymous   |     |   Comment #4
You should be safe.
Anonymous   |     |   Comment #5
Wait for the FDIC to act. You'll be fine provided the sum of your principal + interest is beneath your FDIC insured limit. Do not neglect to include in your interest any amount of accrued interest you might have. I am with them, also, and am taking this course with "big bux" on the line. Good luck!
Anonymous   |     |   Comment #6
Do NOT use WaMU at any cost. They are pure evil.

There are plenty of decent banks but WaMU is not one of them. They are not honorable.

If you live in San Francisco you have a plethora of quality banking options in town. WaMU is NOT one of them.
Anonymous   |     |   Comment #7
Lehman Brothers said in a note that Countrywide's earnings power has declined severely, and The New York Times reported the company fabricated documents related to the bankruptcy case of a Pennsylvania homeowner.

Stay clear of Countrywide! They are desperate, and will falsify documents to stay afloat. All they'll give you is stress about who is going to own your CD once they're toast. I'd bail on them now while you still may have some control over which bank will own your CD.
Anonymous   |     |   Comment #8
I just opened a countrywide saving link account 5.25% for $10K or more, and I was thinking to put money into now.

Seems like more shaky today, don't know should I put do that?
procol   |     |   Comment #9
I have a dream, that my 95k check will have an FDIC logo in the upper left, not a Countrywide one.

I know it doesn't work like that but dreams are funny.

Hey, if they can get Mr. Supertan to do a perp walk, it will all be worth it.

On a serious note, no reason to break a CD and pay a penalty at this point. You'll lose less on a takeover , if it comes to that.
Bozo   |     |   Comment #10
Narrowing margins? How about no margins at all! Here's a good example. KeyBank is currently offering 15 year conforming first mortgages at a smidge over 5.5% APR (check their website if you don't believe me). KeyDirect (their on-line banking arm) is willing to PAY me 5.75% APY for the 10 year CD (>$50,000 but below the FDIC limit, even with interest, since it's an IRA) I am opening.

Stated another way, they are paying depositors more for a shorter term than they are collecting from borrowers, presumably using those same, fungible, dollars. And that's before you factor in even a modest default rate, overhead, and profit (errr, what profit?)

And folks thought the dot coms had a bad business plan.


Anonymous   |     |   Comment #11
@bozo -- The KeyBank mortgage you mention carries a 0.50% origination fee, plus closing costs, w/ 20% downpayment. Even assuming that the bank is match funding this particular mortgage product with the 10 yr CD you're purchasing, the bank will likely not lose money (but not make much, either).
Bozo   |     |   Comment #12
To: Anonymous re KeyBank

You're correct, of course, regarding the origination fee (etc), but it did strike me as funny that the bank was cutting it so close. Maybe Jeff Bezos is on the Board of Directors, you know, let's sell the books at a loss so we can make money on the hand tools? Then nobody buys the hand tools.

Anyway, while we're on the subject of KeyDirect, so far so good on opening up the 10 year CD (a trustee-to-trustee transfer of an IRA). Given the way rates are headed (ouch), getting 5.75% for 10 years looks pretty good. Needless to say, other rungs on the ladder come due much sooner, and I'm hoping we don't go back to the "bad old days" of 3%.



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