Rate Chasing Seems Harmless Enough, but It Can Quickly Become Perilous

Rate Chasing Seems Harmless Enough, but It Can Quickly Become Perilous

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A recent experience I had with an online bank after they lowered their online savings rate demonstrates how perilous rate chasing can quickly become.

For much of 2012 and 2013, a little known online bank offered an outstanding online savings rate that was well above that offered by the other major online banks.  The bank, New York Community Bank (NYCB), operates two online banking brands, Amtrust Direct and MyBankingDirect.com.  I, like many followers of BestCashCow, opened an account with Amtrust during this time and received an interest rate on my savings for more than a year from this bank several basis points above that which I would have received anywhere else.

In September 2013, however, the rate fell abruptly without notice of any sort to customers and all of the sudden depositors in NYCB brands were earning less in their online savings accounts than in accounts at more familiar names like American Express, CIT or GE Capital.  This underscores the first peril of chasing rates: rates on savings accounts can always fall dramatically and without notice.

A second peril came to light when I tried to redeploy money from NYCB to a bank with higher rates.   NYCB’s limitations on numbers of transfers and amounts of money that could be transferred out within a single timeframe made the process of winding down take two months for those who had deposited close to $250,000, the FDIC insured maximum on bank deposits.

To be clear, the bank’s abrupt rate change (during a period where their competitors were actually raising rates as bond yields were rising) and its obstacles to withdrawals were frustrating, but they were well within the bank’s rights.  And, they were necessary and understandable risks that I and many others took to earn a higher savings rate over the period. 

The third peril, however, was not one that I expected to encounter in the chase for the best savings rates. It arose when I stopped short of closing my account after withdrawing almost all of my balance with the bank.  I thought I was being clever by leaving a couple of dollars in my account so that I would be able easily to move money back were they to raise the rate again. Two months later, however, I received a strongly worded note from NYCB stating that they had just instituted a $10 monthly account service fee, resulting in my account having a negative balance.  The letter further stated that the negative balance, if not paid immediately, would result in a closure of my account and the bank reporting “information about your account to credit bureaus, such as Chexsystems” so that  “defaults on your account may be reflected in your credit report”.

I was able  to resolve this issue with the bank by phone, closing the account and avoiding any damage to my credit rating.  Nonetheless, this experience underscores another and perilous pitfall in rate chasing.

You can, however, mitigate these perils.  First, you must follow savings and money market rates closely, checking online with those banks where you have accounts and as well as checking with BestCashCow often to be sure rates have not changed.  Second, you may want to avoid banks that do not allow you to move the balances out quickly (major banks do not impose undue obstacles, but some smaller banks do have monthly limits).  Third, you should always be sure to close an account fully and immediately after you have received your final month’s interest in order to avoid a situation like the one I found myself in.

A Note on FDIC coverage:  Some banks, such as NYCB, operate online banks under multiple online brands.  BestCashCow.com follows an editorial policy of listing only one online brand associated with a single FDIC certificate.   This policy avoids confusion and prevents depositors from unintentionally exceeding FDIC limits.  Since both the Amtrust Direct and MyBankingDirect brands are covered under NYCB’s FDIC certificate, this site is only listed as Amtrust Direct in our rate tables.


Are Bitcoins for You?

Are Bitcoins for You?

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What are Bitcoins and should you get involved with the new currency that is all over the news and media.?

You've already probably heard something about Bitcoin over the last couple months (and if you haven't, you should probably pay some attention) and many are wondering exactly what is Bitcoin and is it for real. Since a Congressional hearing on the currency in November the value of a Bitcoin has soared from under $100 several months ago to over $1,000 today. 

So, what is a Bitcoin and is it something that you should consider getting involved with? Bitcoin is a new type of currency that takes advantage of peer-to-peer technology to facilitate transactions. Like many of the file sharing networks that sprang up around music, it uses connections between individual computers to transfer Bitcoins, or funds, eliminating the need for a central authority - no central bank, no bank, no credit card processor. So, how would a typical transaction work using Bitcoin? 

Anyone can create a Bitcoin by installing software and becoming a Bitcoin miner. A certain amount of work is required for the creation of every Bitcoin, and this amount is adjusted by the network so that the amount of Bitcoins in circulation is controlled and predictable. It's important to note that this is done automatically without the intervention of any central authority. Bitcoins are stored in a digital wallet, and when a transaction is created, the Bitcoins are given a unique digital signature. When you send money to pay for a good or service, the transaction is recorded in the network and the proper ledgers are automatically adjusted. These ledgers are all public, allowing anyone to review the transactions, although the personal information of the sender and receiver is not typically included in these transaction logs. As a result, every transaction is both encoded to ensure it cannot be tampered  and it anonymous, and made public, to ensure that it is executed in an open and transparent way. 

Several private markets have sprung up to allow users to convert Bitcoins to dollars, Euros, or other currencies. It is this conversion rate that has boomed since the hearings. 

So, what are the advantage of Bitcoins? 

  • Zero or low fees. Because there is no middleman, there are very little or no fees associated with transactions.
  • Fast international payments. Bitcoin transactions can be done in 10 minutes from any part of the world.
  • Identity protection. Because there is no credit card number or single number used to key a transaction, there is no chance of having your credentials stolen, like with a credit card.
  • Theft protection. Bitcoins are digitally signed too a user so there is no way to steal a Bitcoin.
  • Universal access. Anyone can pay or accept money via Bitcoin. The system is totally open and the documentation can be read and implemented by anyone.
  • No taxes. Since the transaction is entirely between two individuals, there is no record of the money transfer for tax purposes. Taxes would have to be levied in an entirely voluntary manner.

What are the disadvantages of Bitcoins? 

  • Because money can be sent anonymously, criminal networks and enterprises have begun to utilize the currency to facilitate payments.
  • Boom and Bust. Because no one really understands the value of a Bitcoin, there are wild price swings in the conversion rate of Bitcoins to dollars and other currencies.
  • Not widely accepted. At the moment, only a few merchants accept Bitcoins.
  • Bitcoins can be lost. If a hard drive crashes or a user misplaces their USB drive, the Bitcoins stores on there will be lost. Most experts advise users to store their Bitcoins on a computer device not connected to the Internet and use a backup.
  • No Buyer Protection. If a good is purchases using Bitcoins and the product or service is not delivered as promised, there is no mechanism to enforce refunding of the Bitcoins. Adding a third party escrow service would essentially mitigate the strength of Bitcoin, no middleman.

 Should You Buy Bitcoins?

 If you are just hearing about Bitcoins for the first time and have no desire to actively trade Bitcoins, then I would say know. While the value has shown spectacular growth in the past couple of years, the Bitcoin economy is highly volatile and values could crash any day. No one knows what the future of Bitcoins will be and whether they will eventually assume a widely accepted alternative form of payment, or if they will remain a fringe currency, used by drug dealers and money launderers to escape the spying eyes of law enforcement.

If you're interested in seeing what the future of currency may be about, then it might be worth it to purchase a few Bitcoins, understanding that the value may soar, or may drop like a rock. But it does seem that currency, like music, newspapers, books, and movies is not impervious to the impact of digital technology and the Internet.

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HSBC and Societe Generale Offer US Customers Interesting Debt-Side Structured Notes

HSBC and Societe Generale Offer US Customers Interesting Debt-Side Structured Notes

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I have written several previous articles on this website about Structured Notes. Structured Notes involve real risks. I continue to advocate that those Notes based entirely on equity or currency baskets should be avoided all together in favor of better instruments in the ETF and hedge fund spaces. Nevertheless, I continue to believe that those trying to put money away safely with a long horizon can pick up yield by placing some small part of their assets in debt-side Structured Notes.

As longer term interest rates have picked up in the second half of 2013, we have seen major US banks – particularly Chase, Citibank, Morgan Stanley and Goldman Sachs – come to market with interesting debt-side Structured Notes after having been unable to fund these notes in 2012 and 2013.  US subsidiaries of HSBC and SocGen, two major European banks, have now come to the US market with their own notes.

HSBC’s Structured Note is a 15 year note paying as much as 10% APY (on quarterly payment dates) based on the difference between the 30 year and the 5 year Constant Maturity Swap (CMS) rate note and is very similar to the recent Citibank offering that I wrote about earlier.  This Note, however, is slightly more favorable than the Citibank offering in two respects.  First, the HSBC note is only callable at the first anniversary of its issue and at the eighth, not quarterly after the first year like the Citibank Note.   Second, the Note offers 4.25x the 30 year CMS over the 5 year CMS, whereas the Citibank Note only offers 4x.  Since HSBC and Citibank have similar credit ratings, this Note is arguably more attractive.  I, however, recommend avoiding this Note for the same reason that I told readers to avoid the Citibank Note – the spread between the 30 year and 5 year is too narrow and unpredictable historically to rely on it for the next 15 year period.   (I am more comfortable with the spread between the 30 year and the 2, as was offered by Chase, a better credit rating, in October.)  Those interested in this Note, however, can learn more about it by referencing CUSIP No. 40432XNT4 or ISIN No. US40432XNT45.

Societe Generale’s Structured Note is also based on another much used equation by investment banks these days.   Their offering, also 15 years, pays a fixed 7.75% APY, provided that the 6 month LIBOR rate stays between 0 and 5% and the S&P 500 does not fall by more than 25% from its value on the pricing date.  This Note, called a "hybrid" note because of the two separate contingencies, is similar Note issued by Chase in September (discussed here), but the comparison is not favorable.  While the Chase note only offered 7.50%, Chase has a much stronger credit rating. I also view the S&P knock-out provision in the Societe Generale Note as a real risk on a 15 year note, especially for a Note priced after a tremendous rally in the stock market. Those interested, however, can find this note under CUSIP No. 83368WGG0 or ISIN No. US83368WGG06.

As tempting as Structured Notes are, especially with interest rates looking likely to remain at low levels for a prolonged period, investors would be well advised to take a balanced approach and wait for those with the best terms and highest credit ratings (Chase and Goldman Sachs) and not to chase questionable offerings such as these from subsidiaries of European banks.

Image: patrisyu at FreeDigitalPhotos.net