No More High Yielding CDs?

Banks on the brink of going under have been offering excessive CD rates to bring deposits in the door. This practice has cost the FDIC a lot of money as they have to back the CD deposits when these banks ultimately go under.

Well, somebody at the FDIC finally is doing something to protect the taxpayer – they are going to stop insolvent banks from offering excessive CD rate.

http://uk.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUKN2941127620090529

I looked at the highest yielding CDs on bankrate.com and saw the following publically traded banks’ CDs listed –

Corus Bank – trading at 29 cents a share
Nexity Financial – trading at 20 cents per share
AIG - ***********
Advanta Bank – trading at 67 cents

The CD rate environment will now change as good banks will no longer be forced to offer high rate to compete with bad banks.

The real issue though, is that in an efficient economy, risky companies would have to pay more in yields to attract capital. However, with the FDIC guaranteeing CD deposits, bad banks can attract capital while offering low interest rates. If all are guaranteed, then one CD is just as good as another.

The problem now is that with all of the backstops put in place by the government on so many different asset classes, money is not being deployed efficiently relative to potential risk and potential rates of return. If the government won’t let anybody fail, then why bother doing your homework – just go out and buy the highest yielding crap being offered. It is the rigged bond rating agency game taken to a sovereign level.

Now the only thing at risk is the US Dollar, the US Treasury and the US Taxpayer. But take solace, because nobody feels our pain more than Timmy Geithner – or was that Bill Clinton…