The Trouble with CDs (2010 edition)May 03, 2010 Posted by: Adam Dean
What’s a securities broker to do? The boards and CFOs that have employed them to manage corporate cash have largely and perhaps permanently lost all appetite for the products that were once so lucrative for brokers to sell. Auction rate securities, self-underwritten debt, investments with low liquidity and high underlying risk; because of the pain these investments caused their corporate clients and boards, the broker business isn’t nearly what it used to be. Corporations now demand extremely liquid and ultra-safe investments such as money funds, agencies and treasuries, and frankly, those don’t pay brokers much. Enter the non-negotiable Certificate of Deposit and CD placement programs. For corporations looking for safety and yet hungry for yield, CDs sounded like the best of both worlds. Today that yield benefit is largely gone.
Bank CDs are 100 percent FDIC guaranteed, provided you invest no more than $250,000 with any one bank. Central to the selling of non-negotiable CDs (meaning they cannot be liquidated prior to maturity without penalty) and CD placement programs is the considerable payout brokers get relative to other standard money market options they could offer their clients. In other words, if you are interested only in government-backed investments, there is at least one reason you may be hearing about a CD-only investment strategy instead of a diversified treasury, agency and money fund strategy that leverages a credit research team and fiduciary oversight.
The other reason you may have heard of them was yield. What CDs and CD placement programs used to have relative to more liquid investments was yield. This despite the fact that the unrated regional and community banks that typically use broker sales channels like CD placement programs comprise the majority of the 220 bank failures observed since 2008 and the 57 that have occurred so far in 2010. At the end of 2009, the FDIC classified 702 banks out of 8,022 banks as "problem banks," a sharp rise from 252 banks in the prior year. Yet in this environment, the yields of these non-negotiable CDs have gone down, not up.
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