Wall Street scandals are starting to feel like Groundhog Day.
It seems every day we wake up and another thunderbolt comes hurtling from the sky. First Lehman Brothers fell, Merrill Lynch was sold, and then Indy Bank collapsed. Right on the heels of those scandals came Bernie Madoff and his profit-gutting pyramid scheme.
Today, it’s another banner headline: Stanford Financial Group is being investigated for fraud by the U.S. Securities and Exchange Commission. A centerpiece of the investigation is whether Stanford International Bank fraudulently sold $8 billion in CDs "by promising high return rates that exceed those available through true certificates of deposits offered by traditional banks,” according to an SEC statement. One investor interviewed by Reuters yesterday said he was promised an 8% return on his bank CD: an extremely high - and unlikely – rate for a certificate of deposit.
Once again, another Wall Street scandal begs the question: is your money safe? This time, it’s the stability of the once staid but solid bank CD that’s being called into question.
How can you be sure that your bank CD is safe? Let’s take a look under the hood:
First, the good news. All bank deposits, including bank CDs, are covered up to $250,000 by the U.S. Government’s Federal Deposit Insurance Corporation. That’s a step up from the old number, $100,000, but it may be temporary. The FDIC upped its coverage ante after the big bank scare of 2008. Here’s what the FDIC’s web site says about the change:
“Deposits at FDIC-insured institutions are insured up to at least $250,000 per depositor until December 31, 2009. On January 1, 2010, FDIC deposit insurance for all deposit accounts—except for certain retirement accounts—will return to at least $100,000 per depositor. Insurance coverage for certain retirement accounts, which include all IRA deposit accounts, was increased permanently to $250,000 per depositor in 2006.”
CDs are covered by the FDIC under several types of accounts; primarily single ownership and joint ownership accounts. Each is insured for up to $250,000. But loopholes abound. For example, a husband and a wife could set up separate bank accounts and, in the process, qualify for $500,000 worth of FDIC insurance.
Check your coverage. FDIC coverage is fluid and dynamic and things can change all the time. For example, if your bank merges with another financial institution where you hold a CD, your insurance could be negatively impacted. Lifestyle events – a divorce, or a death in the family, could also impact your FDIC coverage. For a closer look at what the FDIC covers, check out its booklet on the topic.
Calculate what you have under deposit. This one’s a no-brainer. To find out what coverage you can expect from the FDIC based on your CD/bank account activity, once again visit the FDIC’s web site where you’ll find the agency’s Electronic Deposit Insurance Estimator (EDIE).
Get a monthly check. Let’s say that you have $250,000 in a bank CD and the bank fails. Under that scenario, you could lose the interest you’ve gained if that interest pushes you over the $250,000 mark. But here’s a slick move. To avoid that risk, have your current bank send you a monthly check on the interest.
Check your bank’s “safety” factor. I’m a big fan of getting out ahead of a financial problem. So checking to see how safe your bank might be is another no-brainer. We make that easy at TheStreet.com, where you can review your bank’s financial rating. Not only can you check your banks’ safety rating, you can also download a thorough report that digs deeper. With our ratings system, banks can run but they can’t hide.
If your bank fails. Stanford International Bank CD customers might find out the hard way what happens if a bank goes under. Usually a bank failure results in another bank swooping in and grabbing its assets. By and large, the new bank will honor the CD until its maturity date – but it doesn’t have to. No matter what, your new bank will get in touch with you and let you know.
As Stanford investors are discovering today, seeing your bank on the precipice can be traumatic. But if you know where you stand, and take preventive measures, you and your bank CDs can avoid the same fate.
In the process, you’ll do your part to break that Groundhog Day cycle.
Brian O’Connell contributed to this article.