In the current dreadful economic environment, online savings accounts may provide security of your principal (as long as you stay within FDIC limits), but the rates can fall out from under you in a second.
The current economic environment is pretty miserable and the only place to hide is in cash.
But, when you hide, don't rely on the interest rate that is advertised. The reality is that there is no guarantee that you will be getting that rate from one day to the next.
In this environment, banks will compete for deposits with one another on any given day. The next day, the economy will deteriorate, short term treasuries will fall (as will expectations about a Fed rate hike), a bank or two may go under, and the rate that is being offered may fall.
Plenty of banks, including Countrywide and One United, have lowered their savings rates over the last couple of days. As a result, short-term CDs are beginning to look like a much more attractive way to get through this period without seeing the interest rate that you are earning decline immediately. The exception, of course, is the Everbank program, which is guaranteed for new depositors for 3 months (so is effectively a CD).
We've now had five bank failures in 2008 and I wanted to see how we are doing compared to the real estate downturn in the 1980s and savings and loan crisis it precipitated. The results are interesting.
I read an interesting post in the Blog Calculated Risk today. The article showed that the five banks that have failed in 2008 so far (including Indymac) were a blip compared to the 574 that failed at the height of the Savings and Loan crisis in 1989. At that time, the government was forced to bail out the banking industry to the tune of tens of billions of dollars.
Some of the comments on Calculated Risk pose an interesting question. Maybe there were more smaller banks in 1989 so that while there might have been more bank failures, they were relatively tiny from an asset perspective. And maybe one bank failure today is larger than hundreds of smaller bank failures back then. Determined to see if that was the case, I went to the FDIC website, downloaded the data on bank failures and their respective asset sizes, loaded it into Access, did a query or two, and..presto:
The bars show the combined assets of the failed banks for each year while the line shows the number of failed banks. As you can see, the number of failed banks is tiny today compred to ten years ago and so were their respective assets - until Indymac. $32 billion of this year's $34 billion in failed assets were attributable to Indymac.
Let's look at this another way. The chart below shows the average assets for bank failures by year.
The largest bank failure was in 1984 when Continental Illinois National Bank and Trust Company, a $40 billion dollar bank collapsed. As the chart shows, other bank failures during that time kept the average relatively flat. Another intersting, fact, the failure of Continential Illinois was considered to be a forerunner of the S&L mess.
To all of this, add the fact that there are 50% fewer banks today than there were 10 years ago.
So, here's the real question. Is the average so high because small banks have done a better job managing their balance sheets and asset risks and remained solvent? Or is Indymac just an aberration and no more bank failures will be coming? Or, is Indymac, like Continental Illinois, a leading indicator of what will be fewer but much larger future bank failures?
Without great fanfare, this problem has begun to wind down.
For me, the auction rate security problem was the cause of many sleepless nights. In the middle of February, my broker suddenly let me know that all of my cash which he had advised me to move into auction rate securities over the last several years, was illiquid until further notice. He told me that the auctions had failed and that I would be getting higher rates to compensate me for my loss of liquidity. He could not assure me when I would get out of these bonds which led to many sleepless nights as I needed the liquidity.
As the months rolled by, the excuses mounted, as did the obvious and clear indicators of impropriety on the parts of all of invvestment banks (see some of the earlier acticles posted by me and others on BestCashCow.com). Little by little, one by one, many of these things got called away. It started with the municipal and state issues that did not want to, or could not, pay the heavy default rates, and earlier this month, some of the major financial institutions that use auction rate preferreds to leverage their portfolios, including Nuveen, finally gave into the court of public opinion and got rid of theirs.
I understand that Pimco and Blackrock still have not agreed to refinance or refund the holders of their crooked issues. Folks at these organizations should be ashamed that they are continuing to force investors to be illiquid so that they can get higher returns. I believe that they soon will come under pressure to get rid of their auction rate preferreds, leaving these instruments to be a remnant from 2008.
