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Indymac Bank's High CD Rates and Questionable Future


Update 7/11/08: FDIC puts Indymac Bank into conservatorship. See post for more details.

The LA Times published this blog article with the title "For opportunists, IndyMac CD yields are a bonanza" With all the bad publicity, Indymac has to keep rates high if it wants to maintain its deposits. Also, due to the regulatory action which I reported on in this Monday post, Indymac is no longer allowed to accept brokered deposits. So this is another reason they're being forced to offer high rates. Many of Indymac CD rates are way above the rates of the competition. Here is what the article says about this:
For savers, the beauty of federal deposit insurance is that they can't lose money if they stay within the insurance limits. Even if IndyMac should fail, the worst that could happen is that your CD would be cashed out early by the FDIC.

In addition to the risk of having the CD cashed out early, there's also the question of the time it would take to receive your money. I described this and other issues in my Monday post.

Indymac CD rates have recently been changing every few days. The last change was early Tuesday when they raised their 12-month CD yield to 4.45% APY. A reader commented in that post that he was able to move a matured Indymac CD into this 4.45% CD. So you may be able to get around the new money requirement for these specials.

Indymac's future does appear bleak. This LA Times article is titled "Analysts have zero hopes for IndyMac". Two analysts interviewed in the article have cut their price targets for Indymac's stock to zero. Indymac's shares closed at 38 cents today (down from 44 cents yesterday and down from $50.11 when it peaked in 2006).

To see what's likely to happen when a bank fails and another bank acquires the deposits, you may want to review this post on NetBank's failure. The new bank that takes over the deposits is free to close the CD, but they should not charge you any penalties.

Another reader in the Tuesday's post described his experience with NextBank which failed in 2002. In that case, the FDIC was not able to find another bank to take over NextBank's deposits. So they sent depositors checks for their insured money. Here's what the reader described:
The FDIC instantaneously sent me a check for the principal. But the accrued interest put me over the FDIC limit. I wrote it off. The interest rate was so high I still had a good rate of return even with loss of that final interest. But the FDIC did NOT write it off and they did not forget me. Five years later they were still sending me my money back. They sent many small checks, but when added up those checks nearly equal the entire amount of my "lost" interest.

As I mentioned in this post on ANB Financial's failure it's important to keep both your principal and interest below the FDIC limits.

Thanks to the reader who mentioned this LA Times article and the reader who provided his experience at NextBank.

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marc   |     |   Comment #1
As I've said before, the FDIC is essentially subsidizing junk bonds in this case. I would think the FDIC needs to establish some rule of "reasonableness" to the rates of deposit accounts they will insure because I just don't feel it's meant to protect people that put money in a bank that we are fairly sure will go down. On the other hand, they may figure that the amount of time the really high rates will be out there won't be that long, if they indeed do fail so they won't be on the hook for too much interest.
Anonymous   |     |   Comment #2
Does Indymac have next day transfers like Countrywide?

The rates are very attractive now. I want to close out my countrywide account and move funds to indymac if there are no limitations.
Bozo   |     |   Comment #3
To: All
Re: This fiasco called the FDIC

I have posted here, and on other blogs, time and time again, how the FDIC basically allows "iffy" financial institutions to offer sky-high rates on CDs to raise capital with no downside risk to shareholders or depositors. This is ludicrous. As a taxpayer, I am offended, but not surprised. As a buyer of CDs, I am a gobbler of these instruments. OK, we all know how to game the system, but this is obscene.

The FDIC could fix this by charging "iffy" banks that offer sky-high CD rates a higher FDIC insurance premium. That would tend to level the playing field. I guess it's too simple for the Washington folks to figure out.


Anonymous   |     |   Comment #4
I still don't feel the rates are that high. At least not high enough for the hassle that may be involved.
bob   |     |   Comment #5
These rates are NOT unreasonable or skyhigh.

The american taxpayer isnt subsidizing this anymore than they already do millions of welfare families. Mothers who get monthy checks for having children out of weedlock.

Indy is doing what it must to try and remain on its own.

The FDIC must think its the best way or they could have taken them over already.

Ive been contemplating buying a CD but have put it off. I may do that in the next few hours.

Probably both a CD and a money market but of course I will keep the total under $95k so that under no circumstance am I over $100k with accured interest.
Anonymous   |     |   Comment #6
With Feds are bailing out Wall Street Bankers, victims of their own underhanded business dealings,
what's wrong with the FDIC bailing out us individual tax payers and our life savings when a bank goes bust?

The FDIC insurance limits should be raised again to account for inflation.
Anonymous   |     |   Comment #7
IMB stock traded at .28 today and closed at .31. Can the end be far off. My last CD with IndMac matures on aug 1st. With luck, they will go under before then so I don't have to haggle with them to get cd cashed in. The extra quarter % or so is not worth the hassle to me. Of course you guys in the 100K brackets may think it is worth while. Anyway, I will be done with them by Aug 1st.
Anonymous   |     |   Comment #8
It is 7:30 pm EST and I see that today Indy dropped the APR on its one-year CD from 4.35% TO 4.07%!! The 3-year term is now down to 4.35% APR! The e-money market for large balances is now 3.70% Did they suddenly find their way to solvency through an avalanche of (to borrow the term used yesterday by the LA Times) "opportunistic" savers desiring to get in on the one- and three-year deals that were so tempting until this evening?? Crestmark Bank is now the leader in the one-year CD.
Anonymous   |     |   Comment #9
$25,000 - $49,999 3.25% 3.30%

Countrywide is now higher. Glad I didn't switch my account. I was tempted and almost did. Now I am definitely not.

CD's are always short term promotionals. They never last long. If you see a CD rate thats really high and u like it, get it immediately.

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