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How Safe Are Your CDs?
Suppose you had a lot of what I call "chicken money." That's money you can't afford to lose. It's money that belongs someplace really safe, like certificates of deposit at a bank, or perhaps in a money market account or T-bills. But depositing money at a bank isn't without risk, because the Federal Deposit Insurance Corp. doesn't guarantee accounts over $100,000. Astoundingly, the FDIC reports that out of $6.7 trillion in bank deposits, there is $2.4 trillion above the insured limits.


Having uninsured deposits must have kept some people up nights this past week after U.K. mortgage lender Northern Rock faced an old-fashioned "run on the bank." (In the U.K. only the first 2,000 pounds are fully insured; the next 33,000 pounds are only 90% covered, leaving the depositor with a 10% "haircut" in the event of a bank failure.) In order to restore confidence, the Chancellor of the Exchequer took the extraordinary step of guaranteeing all of Northern Rock's deposits.


Many people here in the U.S., especially senior citizens with a memory of bank failures in the 1930s, are very mindful of the limits of FDIC insurance. But you don't have to have a very long memory to be concerned about the safety of your deposits. As recently as the 1980s, many savings and loans and banks that failed left unwary depositors with losses on accounts above the insured limits.


While it's possible to insure up to $1 million at one bank by using a combination of joint accounts and trust accounts, this is cumbersome and many people misunderstand the complex ownership rules.


That's what makes a service called CDARS so appealing. The acronym stands for Certificate of Deposit Account Registry Service. It's a computerized process that allows your large CD deposit to be distributed among multiple banks in amounts below the insured limit, so that all of your money is FDIC insured. It's similar to the process of walking around town to open accounts in multiple banks - but it's all done by computer, and you receive one statement and one rate on all your CDs. And there are no fees or costs to the depositor!


It may sound too good to be true, but this company has an impeccable pedigree. Promontory Interfinancial Network, which offers the CDARS, was started by former comptroller of the currency, Eugene Ludwig. He is the company's chairman. The vice chairman is Alan Blinder, former vice chairman of the Federal Reserve. And the president of the company, Mark Jacobsen, is a former FDIC chief of staff!


Those credentials help to explain why the service, which was launched four years ago, now places billions of dollars of CDs for customers each month. Many of those depositors are municipalities or nonprofit organizations. But one individual investor used the service to insure nearly $20 million in CDs.


The network now includes 1,733 banks (or about one in five of all FDIC-insured banks), which allows CDARS to insure up to $50 million in CD deposits per person by spreading them throughout this banking network.


How Does CDARS Work?


Suppose you are fortunate enough to have $500,000 in savings that you'd really like to keep in your bank. If your bank is part of the CDARS network, it will use the network to distribute portions of your cash - perhaps in six smaller chunks to stay under the insured limit -- to other bank members of the network. This saves you the time and trouble of running around town to open different accounts.


But every time your bank buys a CD for you, the other banks in the network simultaneously deposits the exact same amount back into your bank in separate accounts, where it will fall under the $100,000 insurance limits. In effect, the money never really leaves your bank, but now it is all insured.


The receiving bank does not know your name or have any other personal identification. You're still a customer of your own bank. And with half a million dollars on deposit in your bank, you can demand the highest rates and a lot of personal attention!


All of the accounts at the other banks are in your account number, and all earn the same rate. You get one 1099 form for the interest you've earned. And it's all completely confidential. While you can't direct that your money to go to a specific bank, you can veto use of any bank before the money is distributed. And the service checks, using your social security number, to ensure that it does not distribute your deposit to another bank where you may already have an account.


Your CD can be opened in maturities ranging from four-weeks, 13-weeks, 26 weeks, one year, two-year and three-year maturities. No matter how the money is distributed, all the CDs bear the same maturity date and rate. You'll receive one regular statement detailing the balances of all the individual CD accounts and interest earned.


You can break out of any of the sub-CDs if you need the cash, but the penalties are steep. You'll lose all of the interest you would have earned on a 4-week or 13-week CD. For CDs with longer duration, you will lose half of the interest that you would have earned.


Who Pays? Who Uses?


Banks pay a one-time fee, based on their size, to join the network, and a small fee for each CDARS transaction. The bank -- not the customer -- pays the fees. The CD rate offered by the initial depositing bank is the same CD rate received by the customer, no matter where the smaller segments of money are deposited.


To find out if your bank participates, or to find one that does, check CDARS' Web site.


Banks join the network because having the ability to distribute the insured deposits allows them to attract larger deposits, and retain them, keeping important customer relationships intact. Many community banks are members of the network, and so money deposited in the community can be distributed among other local banks -- helping to stabilize the local banking community.


Nonprofits and businesses that need liquidity and complete safety use the service to keep their money insured, but they also avoid the hassle of opening and tracking multiple accounts.


So if you have a lot of chicken money, now you can sit on a larger, very safe nest egg -- insured by the FDIC. And that's the Savage Truth.

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