A suggestion to the banking industry: Eliminate the FDIC?

An interesting article was forwarded to us this weekend out of Yahoo’s financial section that was released last Friday. It’s titled “Five Suggestions for Banking Reform” and it’s written by Peter Atwater who spent 10 years building JPMorgan’s securitization business in the late 1980′s and early 1990′s.

As the title of his article suggests, he is lending his experience and wisdom to the banking industry by suggesting 5 major reform idea’s which he believes will help the industry grow in a healthy direction. And while all 5 of his suggestions deserve discussion, we would like to narrow in on one specific notion…

As he states, “at the risk of being bold, the time has come to eliminate FDIC insurance.” He goes on to explain that, “When the FDIC was created in the 1930s, it was intended to be a temporary solution. Today, it puts the US taxpayer on the hook for more than $7 trillion in bank liabilities. But as a consequence, depositor due diligence is non-existent. And putting Wall Street aside, this crisis has shown, even with specific oversight, hundreds of now-failed banks took excessive risk in their traditional banking businesses and their insured depositors neither cared nor were adversely impacted. Their risk was borne by the government, while they earned returns far in excess of comparable US Treasuries. If we’re truly going to eliminate “moral hazard”/”too big to fail” we must eliminate deposit insurance in the process.”

How would this effect deposit rates offered by the large banks? If Peter’s suggestion was put into action, would bank CD’s then be considered “risky” investments or would this motivate banking institutions to build a more trustworthy brand?

Top 5 Least Trusted Banks in the United States

An interesting poll was conducted by The New York Times and reiterated on Yahoo’s Finance section yesterday regarding the level of trust consumers place in their current bank. Perhaps not surprisingly, the larger banks fared much worse than the smaller institutions.

The Report: (As seen in Yahoo’s Financial Section)

Forrester’s annual Customer Advocacy rankings, ranks nearly 50 financial services firms in the United States by the percentage of each firm’s customers who agree with the statement: “My financial provider does what’s best for me, not just its own bottom line.” The results are based on a survey of about 4,500 consumers.

The Results:

As we mentioned above, the largest institutions performed terribly in this study and have apparently been performing poorly in these regards for the last seven years (even before the bank collapse of 2008).

“…large banks have generally been at the bottom of the list since the survey was initiated seven years ago, and many of the banks have alternated between the bottom spots year to year…”

Top 5 Least Trusted Banks in the Country:

1) HSBC – Among HSBC customers, only 16 percent said they agreed with the statement.

2) CitiBank – Among CitiBank customers, 26 percent said they agreed with the statement.

3) Fifth Third – Among Fifth Third customers, 27 percent said they agreed with the statement.

4) TD/Commerce – Among TD/Commerce customers, 28 percent said they agreed with the statement.

5) Capital One – Among Capital One customers, 29 percent said they agreed with the statement.

These results coincidentally came out only a couple of weeks after President Obama’s proposal to send the repaid TARP money to small banks.

Bank certificate of deposits finish 2009 with abysmal rates

For bank deposit investors, the year of 2009 has been a year of extremes. The beginning of 2009 coincided with the first, and most severe half of the banking crisis which left many of the large national institutions desperate for funds and thus competing against one another for consumer deposits. Through this competition some of the most lucrative returns (through CD rates, money market rates, etc) were provided to consumers with excess cash seeking FDIC insured investments. This, needless to say, is no more.

A recent NYTimes article was sent in to BankVibe regarding the current state of bank CD rates. Upon reading the article you immediately gain a better understanding of how bleak the situation has become.

Unfortunately for us savers, the government’s response to the imminent collapse of some of the nations largest financial institutions may not have had our best interest in mind. The $200 billion spent on the bank bailout has allowed banks to pass on practically no returns in the form of savings rates to customers.

The outrage, however, lies in the audacity in which some of these banking executives possess — by proclaiming a 1.2% return on a “Savings Plus Account” as a “great rate” — which is what a recent CitiBank advertisement has done. To make matters worse, upon reading the fine print you notice the this rate only applies to balances of $25,000 and above. Shameful.

The NYTimes article goes on to state that in some cases people are actually losing money by opening these deposit accounts after the rate of inflation and potential fees that come with the banking product are factored in.

Timeline of Interest Rates Paid on CD’s throughout 2009:

• January 2009 – Elevations Credit Union offers a 7 month CD yeilding 7.0% APY
• Feburary 2009 – Regal Financial Bank offers 4.0% APY on a 12 month CD
• March 2009 – Navy Federal Credit Union offers 3.75% APY on a 12 month CD
• April 2009 – A 4 month online CD yields 3.0% APY by Danvers Bank
• May 2009 – A 12 month CD yielding 3.0% APY is offered through Melrose Credit Union
• June 2009 -  Quantum National Bank offers a 12 month CD yielding 2.76% APY
• July 2009 – WYMAR Federal Credit Union offers highest CD rates in the country: 12 month CD yielding 3.30% APY with a minimum deposit of $5,000.
• August 2009 – Central Sunbelt Federal Credit Union offers 2.76% APY on a 12 month CD
• September 2009 – The best CD rates in New jersey (Newark) are only paying 2.50% APY
• October 2009 – The best CD rates in North Carolina (Charlotte) are only paying 2.25% APY – and that’s for a 5 year CD.
• November 2009 – The best 7 year CD rates are only paying 4.0% APY
• December 2009 – The best 6 month CD rates in Florida beat the national average by almost 2 x – and they only pay 1.76% APY.

The Future of Brazil’s Economy: Investment Grade.

The potential for Brazil to be among the world’s front-runners as one of the most stable and prosperous economies has existed for as long as it’s been inhabited. It’s natural resource quality and quantity is rivaled by no other nation and it’s society is controlled by a democratic government whom support capitalistic philosophies and open and free markets (although Brazilians still prefer a strong government presence). And when you take a closer look at the formation of Brazil you can’t help but notice striking resemblances to elements seen in the formation of the United States (although not all of them beneficial towards economic growth).

A November issue of The Economist noted several similarities of the make-up of Brazil to the US. The most prominent listed below:

• Both are continent sized countries in the western hemisphere with vast amounts of natural resources.
• Both are controlled by federal democracies in which individual states have substantial power.
• Both were originally formed by small European nations before gaining independence.
• Both populations are comprised of the descendants of their original inhabitants, early colonists and African slaves along with European and Asian immigrants following closely behind.
• Both places show a favoritism of consumption over saving during times of prosperity.

When you combine a country who is rich in natural resources (Brazilian/Portuguese term for understatement), who encountered a similar formation to a country with the largest economy in the world, and a democratic government with capitalistic tendencies, you’re surely bound for financial success, no?

Economic Facts suggesting a very successful 2010 for Brazil:

• Self sufficient in oil.
• Recent discoveries in off shore oil being brought to market.
• 3 out of 3 of the main rating agencies classify Brazil as “investment grade.”
• Brazil has announced it will begin lending money to the IMF (an organization who only 10 years prior was reluctant to lend money to Brazil).
• FDI (foreign direct investment) was up 30% in 2009 while the rest of the world suffered a 14% loss in FDI.

While the bulk of economic gains for Brazil will undoubtedly take place outside of the 365 days making up 2010, the long-term future is certainly bright for this South American country.

Further Reading:

Learn how to add foreign currency bank CD’s to your portfolio, OR foreign currency index CD’s.

Best online brokerage for options traders

Barron’s online broker survey rated OptionHouse the # 1 online brokerage firm for trading options a few months back and we just wanted to make a quick note of it on BankVibe.com. Barron’s survey was based on usability, trade experience, trading technology, range of offers, research amenities, portfolio analysis and report, customer service and access, and costs. 

After we posted TradeKing’s $50 promotion, we figured we would give a shout out to another online brokerage offering an exceptional product.

The Dow has been making somewhat of a comeback over the last few weeks and we have seen many BankVibe readers opt to invest in the market over conservative bank certificates of deposit.

OptionHouse’s Prices:

• Only $2.95 per trade (flat rate for all stock trades!)
• $9.95 flat rate for options
• $14.95 flat rate spreads (up to four legs)

Does this bank stand a chance?

A very interesting story came into our inbox over the weekend…

Apparently the smallest bank in the country resides in a small town known as Oakwood, Texas. With a population of only 512, the median resident age is a decade older in Oakwood than the rest of the state. Maybe it’s these older residents that keeps this bank in business.

Oakwood bank has been around for over 100 years and employees 2 full time staff members along with the president, Rodey Wiley. Forget about going green, Oakwood bank refuses to use computers and provide online banking options to it’s customers. In fact the only piece of “modern technology” used is a typewriter/calcualtor which was manufactured “before Bill Gates was born.”

It’s open for 5 hours a day and the speed of operation seems to move at a snail’s pace…

Michael Jackson secured $200 million in loans from Bank of America

Here is an interesting snippet. According to Yahoo Music, Michael Jackson (RIP) apparently died while roughly $400 million in debt! Wow! That is unbelievable considering he was a multi-billion dollar business at the height of his success in the late 80′s and early 90′s.

What makes this fact even more intriguing is that roughly half of his overall debt ($200 million) was secured in loans from Bank of America!

Apparently he ran into the beginning of his financial problems after news of his first scandal came on the scene in 1993. Shortly after he agreed to a deal with Sony in 1995 to merge ATV with Sony’s library of songs and sold Sony music publishing rights for $95 million. Then in 2001, he used his half of the ATV assets as collateral to secure $200 million in loans from Bank of America.

The yahoo news article doesn’t state any additional facts about the current state of his loan with B of A, but I would have to imagine it is still largely unpaid …and building.

If anyone has any info on this subject please share!

Side Note: Bank of America stock price up 3.25% today.

Is the AIG brand dead??

After the political and social frenzy surrounding the AIG executive bonuses throughout the last week, will AIG ever be able to operate under the same brand name again?

For those of you who haven’t been fully paying attention (or don’t care to), AIG’s CEO Edward Liddy, has been under intense scrutiny by members of the US government regarding unwarranted bonuses promised to most of the senior executives, which are being paid by both you and I and every other United States tax payer.

In a recent interview with Barney Frank, Edward Liddy details the death threats in which some executives (no one in particular) are experiencing. The threats go on to mention not only harming the executives but also family members, etc.

My question though, involves the death of the AIG brand name rather than senior executives.

Would you ever invest in a certificate of deposit with AIG again? Would you ever refinance a mortgage through AIG, even if their rates warranted such a move? Say for example, AIG began promoting a 12 month CD yielding 5.0% tomorrow, would this be something you would apply for? Keep in mind it would still be FDIC insured.

Obama attempting to block bonuses for AIG executives

Semi-good news today for anyone who is still a bit pissed at AIG executives. Apparently, President Obama is attempting to withold the latest $150 million that is supposed to be paid to senior execs running AIG.

AIG’s latest government sum is reportedly worth $450 million ($150 of which is going to executives).

After reviewing AIG’s company profile today, I noticed their company still claims to employee 116,000 people. This number is based off of the company profile page for AIG on Yahoo’s financial site.

My question is, out of the 116,000 employees, how many of them are executives? Maybe 5% or 8% max?

…So out of $450 million, AIG is requesting that 1/3 should go to the top 5 – 8% of the employees? No wonder this came up as an immediate red flag for President Obama.

AIG’s stock soared 40% today in trading.

JPMorgan Chase offers $400,000 to laid-off workers

A measly attempt was made by JPMorgan Chase yesterday to win back support from main street.

In a nut shell…

They offered $400,000 to help pay severance to laid-off workers occupying a Chicago factory whose protest has come to symbolize resentment over the federal bailout of big banks while workers suffer. Although this offer is better than nothing it is still far less than what should be called for. To a lot of people this seemingly heart felt donation was simply a half-baked publicity stunt in an attempt to rebuild a once reputable name. Let’s not forget who really funded this $400,000 anyway -you and me! JP Morgan Chase received $25 billion from tax payers in the bail-out earlier this year and so far 0.0000016% of that total has gone to displaced workers.