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January 29, 2008
Just a note on how the FDIC works
Market movers has a piece on why countrywide was sold to Bank of America, called How Gene Ludwig Forced the Countrywide Sale. The piece is OK, but Felix says:
...Countrywide's next step: selling federally-insured certificates of deposit at interest rates of more than 5%. ... his makes perfect sense. Buying a high-yielding CD from Countrwide is a no-risk no-brainer for the saver; for the guarantor, by contrast, it's decidedly unpleasant. With the amount of money invested in those CDs increasing by over $2 billion a month, it was only a matter of time before the FDIC started cracking down on the practice.
While it is true that the FDIC insures principal and accrued interest combined on bank accounts and CDs worth less than $100,000. I should note to the reader that FDIC bank closures can take months or in cases of large numbers of contemporaneous failures, years to repay depositors, and in that time you will not accrue interest. So you may get a short while with a teaser rate, and your may get the bulk of your money back eventually, but you could go a while with much of your investment's value eaten by inflation and opportunity cost.
Dr. William Hisker of Saint Vincent College taught me this lesson about how the FDIC works many years ago as an anecdote in a lecture he gave on public finance.
Posted by OneEyedMan at January 29, 2008 7:43 AM
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