For opportunists, IndyMac CD yields are a bonanza

Struggling to hold on to depositors, IndyMac Bancorp now is offering the highest yields in the nation on six-month and one-year savings certificates.

And the troubled Pasadena-based thrift isn’t just edging competitors on yield -- it’s trouncing them.

That also raises some questions, of course -- including the moral-hazard question: Should a money-losing financial institution be permitted to pay well-above-market deposit rates under the protective umbrella of federal deposit insurance?

For a six-month CD with a $5,000 minimum deposit, IndyMac’s website on Tuesday was offering an annualized yield of 4.10% as an online "special."

The next-highest-paying bank in the nation for six-month CDs was Corus Bank of Chicago, with a 3.7% annualized yield, according to Bankrate.com.

IndyMac on Tuesday was paying significantly more than it was on Sunday, according to Informa Research Services of Calabasas, which tracks savings rates. The six-month CD yield had been 3.75% on Sunday.

IndyMac’s one-year CD yield was 4.45% on Tuesday for a $5,000 deposit, up from 4.10% on Sunday. Its top competitor banks were paying in the 4% range on Tuesday, Bankrate.com showed.

On Monday, IndyMac announced a major retrenching, all but halting traditional mortgage lending as it seeks to conserve capital. The company’s stock closed at a record low of 44 cents Tuesday, and some Wall Street analysts say the shares will almost certainly end up worthless.

But IndyMac’s plan, at least for the moment, is to survive -- despite what its share price is suggesting. To stay afloat it has to keep a chunk of its $18 billion in deposits, even as some customers naturally are fleeing because all of the bad publicity.

Ergo the high yields it’s offering.

The thrift’s regulators obviously know what it’s paying. A Federal Deposit Insurance Corp. spokesman, citing standard policy, declined to comment on IndyMac’s rates.

There’s a bit of irony here: The company’s regulators are partly responsible for IndyMac’s high yields, because as part of their increased oversight of the firm’s operations they’ve banned it from accepting so-called brokered deposits. Those deposits are brought in by intermediaries searching for the best yields for big-money clients.

With that source of funds gone, IndyMac looks like it’s turning more toward individual depositors.

Should they bite? 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.

That just leaves the moral question: Should people be taking advantage of high, federally insured yields at an institution that has lent money as badly as IndyMac has?

Photo: Tim Rue/Bloomberg News

Comments

[al key]

what do you know besides the mainstream drivel about indymac to qualify asking : "Should people be taking advantage of high, federally insured yields at an institution that has lent money as badly as IndyMac has?" Indy was by no means unique in its lending practices or loans it offered. It's easy, convenient and intellectually shallow to jump on the bandwagon and bash whoever happens to be the lender du jour in financial trouble.

[johan]

How can it be said that Indymac lent money badly. The lent money was used to help a family realize the American dream, and the home is not going anywhere, it's value will eventually continue to go up. What is bad is that now millions without perfect credit will not be able to own a home and have a chance at the American dream because of what this credit crunch has done.
If you want to criticize lenders, then look at the ones that lend thru credit cards at exhorbitant rates so that people buy things beyond their means, and have nothing to show for it.

[Susan]

These are great deals because I do not think the government will let IndyMac fail so at worst case they get taken over like Countrywide Bank. If you look at bankrate.com or money-rates.com you can see that that many of the banks paying over 4% or 5% are the same ones with the bad stock prices. So maybe the little guy benefits from all the competition from the struggling banks to keep deposits.

[Mike]

I own two accounts with this bank. And I think it is very Moral to take advantage of a high yield CD offered by Indymac with the comfort of knowing it is FDIC insured! If I had $500,000.00 more I would put my money in several CDs.

[Yen]

I don't see how this is a moral question. The bank obviously is doing what it can to survive -- that's not immoral. Immoral is knowing you are going to fail and continuing to provide high yields. To me it only seems to be a moral question if you assume that IndyMac will fail and you assume the bank and the investors believe it is already DOA.

[Mickey malone]

"What is bad is that now millions without perfect credit will not be able to own a home and have a chance at the American dream because of what this credit crunch has done......"

How many people 'speculated" ,took the money and ran, and thenleft the renters with no place to go. Now 700+ credit scores can only qualify a $250,000 home. How long will it take the prices to drop to $250,000.?

[Scott]

IndyMac actually was a decent lender, they have been pulled apart by circumstnace.. they sepcialized in construction lending and super jumbo products, both heavily in the California market, and both have been pounded... the super jumbos have no liquidity for sale, and the houses used as collateral themselves have crumbled in value, so the write downs have been massive. The qaulifying borrowers originally, and currently, can probably afford the loans, in most cases, they are just walking away from the house rather than be upside down hundreds of thousands of dollars.

In trying to keep with the times, they got into agency-backed lending (Fannie / FHA / Freddie, etc.) but haven't been terribly successful.. simply because it was out of their core business.

[Jason]

Johan:

Just as credit cards can be used to allow people to "buy things beyond their means" so too can mortgages that allow people to buy housing beyond their means. They too will have nothing to show for it, except a foreclosure on their credit record. And clearly Indymac lent money badly. One only has to look at their increasing charge-off rate for tangible evidence.

[Dan]

Mike: *please* do not even consider putting more than $100k in any institution untill you have gone to the FDIC website. There you will find some excellent information regarding what deposits are, and are not, insured.

The practice described in the article is what we referred to during my years with the FDIC as running on "hot money". Generally it is an indicator that the bank (or in this case S&L) has no other means to raise funds - say through earnings or the capital markets - so it turns to soliciting deposit accounts by offering higher than normal interest rates.

It is usually (ok, make that "never") a good sign.

[The Real Estate Guy]

Johan,

What did you drink this morning???

[Shirleen]

I sold off CD's today at .9725 on the dollar that were not insured. Did I panic or do you think Feds will not let them fail and encourage a bank to step in?

[Ann]

Why not take advantage of the high rates? Do we really want to lose another local bank? I personally would like to see them survive and grow and provide more jobs to the community. I really have to wonder why the LA Times wants them to fail. Perhaps it is because the LA Times is not really a part of the Los Angeles community anymore.

[Dan]

Shirleen:

When a bank (or S&L) fails the chartering authority as well as the FDIC try very hard to find an Assuming Bank for what we used to call a "Whole Bank Purchase and Assumption Agreement". Under such an agreement the purchasing bank would normally assume all (insured and uninsured) deposit liabilities.

Unfortunately, you can't count on the optimum transaction coming together. In fact, in the current enviornment such transactions are highly unlikely (my opinion).

Moreover, the legislation governing how the FDIC "resolves" problem banks requires that the FDIC pursue the "...least cost alternative" - which usually means that those with uninsured deposits loose. (As always, there is no problem whatsoever with insured deposits.)

It's tough to take a loss on a CD, but if I were you I would certainly be sleeping a bit better now.

[Sam Cass]

Indymac has actually been raising rates for some time. Before it went to 4.45% APY for the 1 year CD it paid 4.35% APY and a week or so before that 4.25% APY. They've clearly been trying to raise deposit money for some time.

I don't see the moral hazard. FDIC coverage in and of itself is moral hazard. Investors would amost definitely behave differently if banks in general didn't have it. If depositors can save Indymac it will cost the FDIC far less than if they have to bail Indymac out later on.

The next highest paying rate on a 6 month CD is not Corus bank BTW but Ascencia. Check the BestCashCow rate tables:

http://www.bestcashcow.com/cash_equivalents/best_six_month_cds.html

Bankrate is frequently wrong unfortunately.

- Sam

[Susan Mangione]

For longer terms, http://BankCD.com lists several banks that pay higher rates than IndyMac. Also, they list several banks that pay higher six-month rates than the Corus Bank mentioned by http://Bankrate.com.

[Judekenneth]

"moral-harzard question" did you check the dictionary before using your phrase or did you just want to write because it is now fashionable to write negative things about lenders, particularly Indymac? If you were calling the shots at Indymac, what would you do? Ever wonder why BAC, WM, NCC, FBTX, PFB, WFC, and the rest of the financials are going down? Bad lending, right? Immorals? I do not agree that people who should be writing fictions be appointed to write fact-based proses for any society. Write some poems - editor, you'll make more sense. But, let an American tax-paying institution survive!

[lee shofler]

The whole problem is greed, why are Americans the target of scam after scam, and user rates on credit cards. it will be the end of America, as it once was if this continues, think about what is being left for our Grandchildren

[martscan]

Why isn't the community pulling for this bank to survive? For chrissakes, everyone and his brother is an overnight expert on regulations and the complexities of risk equation. I'm sick and tired of it. I'm holding my IMB stock and getting a CD there tomorrow.

[Kevin Cafferty]

Currently, the rates after on 3-month, 6-month and 12-month CDs at http://www.moneyaisle.com are beating all of the popular comparison engine's offerings with the exception of Indymac (for the reasons stated in your blog) - all the banks in the MoneyAisle network are adequately capitalized, in contrast to Indymac's current state.