This is not your FDIC. This is the Rich White Man's FDIC.

September 26, 2008 2:47 AM

A private FDIC?

The Certificate of Deposit Account Registry Service, or CDARS, is a way to conveniently spread bank accounts across multiple banks. CDARS, run by privately held Promontory Interfinancial Network, offers its customers up to $50 million of deposit insurance, or exactly 500 times single account limit mandated by the FDIC. Promontory does this by arranging to distribute client funds nationwide in $100K increments to over 2,300 banks. Promontory is nothing if not well connected: while founders Mark Jacobsen previously served as Chief of Staff at the FDIC, co-founders Alan Blinder was Vice Chairman of the Federal Reserve and Eugene Ludwig was Comptroller of the Currency, several former members of the FDIC currently serve on Promotory's board.

Not surprisingly, some folks are openly critical of Promotory, some going so far as to state "It undermines a lot of the safeguards around the FDIC deposit fund."
posted by Mutant (64 comments total)

If I had more than US$100,000, that's how I'd approach it.
posted by kalessin at 2:53 AM on September 26, 2008

Many thanks to SeizeTheDay for bringing CDARS to Metafilter's attention in an earlier thread. I had absolutely no idea this system existed ... not that I'll be using it. Something about CDARS seems very inappropriate, especially so in these turbulent times. We're all in this together, after all.
posted by Mutant at 2:53 AM on September 26, 2008 [1 favorite]

Alarmingly, FDIC Chairman Sheila Bair is none the wiser, "That's an interesting question,'' she says. "I'll have to look into that.''
posted by netbros at 2:56 AM on September 26, 2008

I fail to see what is inappropriate. Each bank pays for the FDIC insurance, right?
posted by blue mustard at 3:24 AM on September 26, 2008

One of the links goes to an article on bankrate.com which provides bank ratings.
posted by atrazine at 3:38 AM on September 26, 2008 [1 favorite]

It's simpler here in the UK, you just put your money in northern rock.
posted by fistynuts at 3:58 AM on September 26, 2008

FDIC will probably require some 2.5 billiion bailout as more bankis go down the drain.
posted by Postroad at 4:18 AM on September 26, 2008

The "interesting question" that Chairman Bair is referring to above has to do with the fact that CDARS takes a bigger cut from member banks - they basically get paid more than the FDIC by participating banks. CDARS gets paid @ $12.50 per 10K as a fee, whereas the FDIC gets @ $5-7 per 10K as an insurance premium.

I work for a bank that offers this product. We do not make any profit on the product. I was not the person who decided to offer the product.

Having said all that, here's a little more insight about how the system works - not just at our bank, at all memeber banks. A bank typically chooses to participate as a CDARS member bank in a reciprocal agreement - for every dollar a bank places in the program, they accept a dollar. Information is collected from the customer about the amount they would like to move into the program, the term (4 weeks to 3 years), and any banks they would like to exclude from placement - customers MUST exclude any banks where they already have money for obvious reasons. They can also exclude banks "just because". They cannot choose where their money is otherwise placed. When all the customer paperwork is done, an order is set up with Promontory/CDARS through a web portal. That portal is locked down on Thursdays - all orders are placed at the same time so that cross checking can be done about whose money goes where in the network of banks. The "key" in the system is SSN/TIN, since FDIC rules regarding insurance are driven by account ownership.

Customers get a consolidated CDARS statement from Promontory that lists all the banks where their money was placed, and for which amounts. The amounts are always sub-100K, and are driven by the term the customer selects - a 3 year CD will be placed for a lesser amount becuase of the interest that will accrue over time. Customers who are about to mature will get a notice 15 days prior to maturity - it is the customer's responsibility to notify their bank if they want to reinvest - if they don't, the money rolls back into the account that funded the CDARS buy. There is no grace period for these CDs.

As mentioned in the article, this process automates something a customer can do legally themselves (or can pay a broker to do for them at the cost of an up-front fee). Most banks who participate do not charge an upfront fee - each bank does, however, set their own rates for CDARS CDs. This means for the most part, banks are setting their rates lower on these CDs than the "market rates" on other CDs to offset the $12.50 per 10K mentioned above. Frankly, most customers are more than willing to accept this as the cost of insurance, and also as the cost of "not having to do all the legwork themselves".

I think the heart of the question is this - does CDARS make it SO easy to participate that customers who would NOT otherwise do the legwork (or pay the broker fees) to place all their money at manymany banks are now doing so - THAT would be the real strain on the FDIC system. I confess I don't know the answer to that question.
posted by ersatzkat at 4:21 AM on September 26, 2008 [14 favorites]

Bailout Backlash
posted by adamvasco at 4:30 AM on September 26, 2008

Do they keep their account data spread across multiple gmail accounts?
posted by pracowity at 4:40 AM on September 26, 2008 [2 favorites]

Who puts $50 million into bank accounts? I mean really? If you are keeping that sort of cash in a savings account then that money is dirty and its just a step up from burying it in your back yard or stashing it in cash in a safety deposit box.
posted by Pollomacho at 4:51 AM on September 26, 2008 [1 favorite]

Who puts $50 million into bank accounts?

Businessmen and women, small companies, doctors' offices, law offices, people who just inherited money, athletes, actors and actresses, CEOs, CFOs...

Rich does not equal illegally obtained money (per se).
posted by SeizeTheDay at 5:01 AM on September 26, 2008

It's not that it's illegal money, per se, but legitimate money of such a large volume would probably be under the care of a financial advisor, and invested in stocks, bonds, etc. rather than the CDs offered by banks. So yeah, "Who puts $50 million into bank accounts" is a good question. I doubt doctors' offices and small companies have that much cash that they need a bunch of accounts.

I don't see the inherent problem with this, regarding FDIC. More money saved in banks means more fees paid to FDIC, and since the money's divided among 2,300 banks, the chance of failure seems nearly zero. If it was a loophole that was allowing them to invest, for instance, into 2,300 different branches of Bank of America, I'd understand, but they're all different banks! If Bank of Montana (for instance) takes on a few extra million and mismanages it and FDIC needs to activate, the funds will be balanced by all the other additional funds from other banks who got CDARS millions and paid additional FDIC fees.

I guess I understand that this does, overall, increase the scale at which the FDIC is operating, but that can only be a bad thing if savings banks do something catastrophic despite the regulations put forth in the wake of the S&L scandals. Noting of course that financial banks are having a similar melt-down, but the savings banks are doing fine, and no one's seeing their local bank have a run on the vaults.
posted by explosion at 5:25 AM on September 26, 2008 [1 favorite]

Businessmen and women, small companies, doctors' offices, law offices, people who just inherited money, athletes, actors and actresses, CEOs, CFOs...

Rich does not equal illegally obtained money (per se).

Rich does not also equal stupid. What sort of doctor's office has $50 million is cash (probably the one that cuts the cocaine packets out of the drug mule's bellies)? People with $50 million put their money in investments. They invest in banks, not deposit it into basic accounts that would be covered by FDIC. They own the building that the bank sits in.

Of course, I say that, but now a 0% return for investment and an FDIC insurance policy is far better than a negative return and whoops! the bank you invested in just failed.
posted by Pollomacho at 5:35 AM on September 26, 2008 [4 favorites]

$50 million is the max. I'm not sure why you're fixated on that number. It could easily be $500k or $1 million, which are reasonable amounts of cash to have on hand, but way above the FDIC limits.
posted by smackfu at 5:43 AM on September 26, 2008

This is pretty awesome though:

Isaac says he's not sure what role he plays at the company. "I think I'm some kind of an adviser or director," he says. "I'm not really involved. The board of advisers has never met. I allowed them to make me the chairman of a bank advisory board that has no members."

posted by smackfu at 5:47 AM on September 26, 2008 [1 favorite]

Similarly, if you have millions of dollars and a diversified portfolio, you are very likely going to invest a chunk of those millions into something very, very stable even if it's got a very, very low yield. No matter what fails, you've got money somewhere else.
posted by ardgedee at 5:50 AM on September 26, 2008

I've been reflecting on the banking mess, and proposed bail outs.
My assumption is that we need to limit bank failures not so much to protect direct depositors, but to protect investment counter parties. I think this is to prevent a spread of failure from the least substantial banks to those that have been more responsible, effectively stopping a "run" on the banks driven by failed counter party investments. - Am I right here?
Fundamentally, it is no threat to the system if bad banks go down, unless they drag the "good" banks with them, or, by that measure, are there are no, or very few, good banks left standing, so the whole financial system fails.
Am I right that this is what we are working toward?
Because at the moment, the bail out proposals, and particularly the $700b treasury proposal seem focussed on propping up institutions that probably should take their medicine, and at least see their equity owners suffer a loss.
I think the crux of the current issue is that there is a fear they will then default on their counter party investments, delivering losses to other well capitalised banks.
And the outcome is feared to be there will not be any portions of the banking industry immune, so they will all fold, killing the financial system along the way with depression era consequences.
Again, is this right?
Because if I am reading it true, wouldn't it be smarter to guarantee the counter party losses and let the cowboy banks go under, with the result the better capitalised banks would then be able to prosper?
I fail to see how propping up some banks suffering from failed investments is helping the health of the system. Fundamentally, is it a question of liquidity or insolvency?
posted by bystander at 5:59 AM on September 26, 2008

It could easily be $500k or $1 million, which are reasonable amounts of cash to have on hand
Not for 99.999% of the population. Explain the consequences if the richest portion of the population take a bath.
posted by bystander at 6:01 AM on September 26, 2008

The 50 Million is the extreme end of where the insurance cuts off.There probably isn't too many people with that in cash, but I'm sure there's more than a few people who want to keep over 100k in their banks. Anyone with a net worth over 10 Million who wants to keep 1% or more of their assets in cash would use this.
posted by ShadowCrash at 6:03 AM on September 26, 2008

-> It could easily be $500k or $1 million, which are reasonable amounts of cash to have on hand

-> -> Not for 99.999% of the population

Perhaps 95% or so. America has a lot of money. A great book Richistan breaks it down and will leave you laughing and enlightened about the distribution of weath in America - who they are, how they got it, what they do with it.
posted by stbalbach at 6:06 AM on September 26, 2008

I fixated on $50 million because it is the max. The FDIC limit is $100 K, it would be silly to have $100 K in a single banking instrument, but I suppose thare are some people who want to be able to write a check for their new car. I had a boss who had several checking accounts with $100 K in each of them. I thought he was a moron at the time, but I suppose he has the last laugh today. Maybe I should have trusted the guy that was personal council to the CEO's of many of the world's leading securities firms to know that a bank account might actually not be a terrible place to put your money.

My thinking is so dated. Its from way back in the day (a few weeks ago) when investing meant positive returns rather than finding places to stash money with less negative returns. You know they actually offer negative return bonds now? I mean what the fuck? I joke, but gold bars, a shovel, and a crate of ammo looks like a better portfolio every day!
posted by Pollomacho at 6:06 AM on September 26, 2008

I don't think the FDIC has ever adjusted for inflation, either, so the 100k limit is becoming less and less very year. 100k in 1935 was roughly 1 million today. By the time I retire, 100k will be worth even less.
posted by ShadowCrash at 6:08 AM on September 26, 2008

Yeah, unequal distribution of wealth discussions always go so well here.
posted by fixedgear at 6:13 AM on September 26, 2008

Pollomacho, what's a negative return bond? I give you 100, you don't pay any coupons, and at bond expiration you give me back $98? I can see someone overpaying for a bond in the secondary market ending up with a negative yeild, but this doesn't mean the original security had a negative return.
posted by ShadowCrash at 6:14 AM on September 26, 2008

"I doubt doctors' offices and small companies have that much cash that they need a bunch of accounts."

It's not unreasonable to imagine say a four doctor practice with a combined payroll of over a million dollars a year and $400 thousand in malpractice insurance premiums. Even assuming (to simplify) no other expenses, a three month operating reserve would be $350,000 dollars.
posted by Jahaza at 6:15 AM on September 26, 2008

Agreed, you would be the odd one out if you were rich but left lots of your wealth in the bank.
Wiki says 0.007% of north americans have a net worth above $30m, perhaps a worth that could have a high bank balance (over $1m). Who are these bail outs saving except the bank equity holders and employees?
posted by bystander at 6:18 AM on September 26, 2008

I give you 100, you don't pay any coupons, and at bond expiration you give me back $98?

That about sums it up. The terms of the bond are such that it is actually worth less upon return. It's a way to stash money in an investment vehicle knowing that the investment markets are in the shitter and will only yield an even worse return. I give you $100 bucks with a promise of $98 later because I know anywhere else my $100 will only be worth $90 at the same point.
posted by Pollomacho at 6:21 AM on September 26, 2008

Is $100k a reasonable limit? It appears that the amount insured by the FDIC was raised to that level in 1980. According to the inflation calculators I tried, that translates to 2.5 to 3.5x that today, so adjusting for inflation, FDIC insurance provides only about 1/3 of the coverage it used to; I could easily see an argument made that today's limit should be $250k.
posted by fings at 6:25 AM on September 26, 2008

ShadowCrash, it's actually been adjusted several times since its inception. Inflation adjusted, it's actually higher today than it was in 1934.
posted by Bezbozhnik at 6:25 AM on September 26, 2008

ShadowCrash, it appears in 1935 FDIC insurance was 100% for $10k, 75% for the next $40k, and 50% for everything over $50k.

I'm getting my info from here: http://www.fdic.gov/bank/historical/brief/brhist.pdf
posted by fings at 6:29 AM on September 26, 2008

This article has a graph that shows the inflation adjusted amount of the FDIC limit.
posted by burnmp3s at 6:35 AM on September 26, 2008

Correct link
posted by burnmp3s at 6:35 AM on September 26, 2008

I give you $100 bucks with a promise of $98 later because I know anywhere else my $100 will only be worth $90 at the same point.

I don't get it. At least one "anywhere else" is "under my mattress", and that always returns $100.
posted by smackfu at 6:38 AM on September 26, 2008

> At least one "anywhere else" is "under my mattress", and that always returns $100.

Whatever happens to the bank you put your money in, you have at least $98 left. If somebody robs your mattress, you have $0 left.
posted by ardgedee at 7:02 AM on September 26, 2008

At least one "anywhere else" is "under my mattress", and that always returns $100.

Whatever happens to the bank you put your money in, you have at least $98 left. If somebody robs your mattress, you have $0 left.

That's a good example of why actually putting money under a mattress is a bad idea, but it's not a good example of why negative return bonds would make sense. If you don't trust T-Bills enough to invest in them for a positive gain, why on earth would you invest in something that gave you a gauranteed negative return in dollars? I won't believe that this actually exists unless someone cites proof.
posted by burnmp3s at 7:13 AM on September 26, 2008

I won't believe that this actually exists unless someone cites proof.

You're right, negative rates are extraordinarily rare, but they did occur in Japan a few years back.
posted by blue mustard at 7:41 AM on September 26, 2008

I'm kinda slow. So I understand -- is CDARS actually offering any insurance themselves? Or are they just a middleman spreading someone's money into FDIC-sized increments at multiple banks? And if something goes wrong at one of those banks, then it's still the FDIC in charge of covering those funds, right?

So (in my mind) CDARS is more of a concierge for money; is this at all accurate (if a bit simplified)?
posted by inigo2 at 8:46 AM on September 26, 2008

Promontory does this by arranging to distribute client funds nationwide in $100K increments to over 2,300 banks.

Yikes, such scheming.

Thinking about this whole undermining business, have been observing what seems to be the eroding of the separation of church and state in Republican Party politics. Since they seem to have a stronghold on the banks I'm wondering if their hidden agenda is some kind of Christian Banking system? Or perhaps their agenda is more a punitive one, to punish or lord it over others who are not Christian? Or not rich?

Just today in the New York times, Ministers to Defy I.R.S. by Endorsing Candidates.
posted by nickyskye at 8:52 AM on September 26, 2008

If anyone is interested in buying some negative return bonds, I'm selling up to 50 million of them. You'll receive a full 49 million in return when the bond matures, and my bond is as safe as an FDIC bank account, so no worries about my ability to pay. I'm even willing to make the bond maturity be whatever time limit you prefer.
posted by ShadowCrash at 8:55 AM on September 26, 2008 [2 favorites]

I won't believe that this actually exists unless someone cites proof.

You're right, negative rates are extraordinarily rare, but they did occur in Japan a few years back.

I think we're turning Japanese.
posted by Pollomacho at 9:04 AM on September 26, 2008

Promontory does this by arranging to distribute client funds nationwide in $100K increments to over 2,300 banks.

It's like 2 bitstorrent, amirite?
posted by Cat Pie Hurts at 9:08 AM on September 26, 2008 [1 favorite]

The money in your mattress is robbed by inflation.
posted by horsemuth at 9:11 AM on September 26, 2008

I think we're turning Japanese.

Ah, okay, that makes sense. I thought you were saying that as of today, there are corporate or government bonds offered that have negative dollar yields. That clearly wouldn't be the case because current T-Bill rates are still positive for all maturities.
posted by burnmp3s at 9:17 AM on September 26, 2008

ha! This does not surprise me, I would have thought the FDIC would close the loophole, the only costs for this guy have to be the overhead / marketing. I would also not be surprised if CDARS thought they were depositing money in FDIC accounts but due to fraud or fancy accounting the money ended up in less than honest funds or non-FDIC insured vehicles and then poof, the house of cards falls apart. Seems less of a hassle to just deal with treasuries , there's always liquidity there, but I could be misunderstanding the average customer and how they're using this.

$12.50 per 10k? Let's do this for $12, I have a feeling actual costs are probably disgusting, like $4 every 10k and they're just pocketing the rest. Genius.
posted by geoff. at 9:19 AM on September 26, 2008

Spreading your money around multiple banks like this provides some diversification in itself - it's pretty unlikely that more than one or two of these banks will fail at any given time (except in rare periods like we're in). So it's basically rich people paying a middleman for peace of mind, without really increasing the FDIC's exposure much (as a percentage of total insured deposits), because significant risk reduction is already baked in just by using multiple banks.
posted by chundo at 9:24 AM on September 26, 2008

As I understand it, the standard FDIC $100k guarantee (something that's never been tested by the way) applies to ownership, not to account. Thus if you put $100k in one account and $100k in another account, and for both accounts the ownership is under the same name (or names), the FDIC is only guaranteed for $100k for that ownership--and not for the two accounts. A way around this is to--to follow the example--claim one of these two accounts in a joint ownership, and the other one is a single-person ownership: thus creating two different ownerships.

Presumably CDARS has found a way around this for its client members, but in any event I think in any real-world scenario (an Argentina-style bank-run), all bets are probably off with all these FDIC guarantees anyway. Obviously, the FDIC guarantee has never been tested in a worst-case scenario like that, and hopefully never will be.
posted by ornate insect at 9:25 AM on September 26, 2008

So I guess what I'm saying is, what's the fuss? It's been around for a long time, and the government knows about it, and yet has not closed this "loophole." At some point it ceases to be a loophole and must be recognized as a legitimate part of the system.
posted by chundo at 9:27 AM on September 26, 2008

ornate insect - it's per owner, per institution.
posted by chundo at 9:28 AM on September 26, 2008

ersatzkat states the banks pay an insurance premium to the CDARS instead of the fdic, and the cost is more (12.5 vs 5-7). From what I'm reading, it looks like CDARS isn't insuring the money, the FDIC still is. I'd guess the profit for the CDARS banks is that they issue the cd's at a slightly lower premium to offer this service.

ersatzkat, can you clarify where you got those numbers from?
posted by ShadowCrash at 9:32 AM on September 26, 2008

Ornate insect - The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
posted by ShadowCrash at 9:35 AM on September 26, 2008

Yes, but inflation affects all money, not just money in mattresses. A negative return is still worse then stashing cash.
posted by Nothing at 9:57 AM on September 26, 2008

be under the care of a financial advisor, and invested in stocks, bonds, etc

That's not lookin' like the best option right about now.
posted by MikeMc at 10:04 AM on September 26, 2008

Could someone explain the difference between this and someone with 1M going around to 10 different banks, opening up one account at each bank, and putting 100K in each? Other than the huge time waste...
posted by SirOmega at 10:07 AM on September 26, 2008

ShadowCrash - the Bloomberg article linked above. We offer the CDs at a slightly lower APY to offset the fee we pay to Promontory. FDIC still gets their cut of that fee, but the difference between 5-7 and 12.50 is Promontory's profit.

inigo2 - the insurance is still FDIC - Promontory doesn't offer any insurance. The customer money is actually moved through the banking system by Bank of New York. Promontory just offers the software that tells BONY where to put the money.

In a reciprocal purchase agreement (we accept a dollar for every dollar we place), customer funds are moved once a week to a special CDARS G/L and the money never actually *goes* anywhere - it's just reallocated in the ledger as being "owned" by someone else.
posted by ersatzkat at 10:14 AM on September 26, 2008 [1 favorite]

SirOmega - there's no difference. I really see, as mentioned above, that the concern is this - it's very easy with CDARS to do this without the huge time waste and/or a big upfront broker fee. LOTS of people who previously found it expensive or onerous to make sure that their funds were covered are now so panicky that they are rushing in droves to use this service - this means the FDIC is insuring a LOT more money than they did even 6 months ago. I don't know that there is any way presently to figure out what that number is.
posted by ersatzkat at 10:20 AM on September 26, 2008

If the big banks collapse, the FDIC means nothing because its funds will be depleted by the first bank to fail.
posted by Dragonness at 10:32 AM on September 26, 2008

The FDIC can run a negative balance on their fund. They've done it before, like in 1991 when it was $7 billion under. You may want to get better informed.
posted by smackfu at 10:39 AM on September 26, 2008 [1 favorite]

Smackfu, tell me more. How much under can they go? Because the numbers being bandied about are way past $7 billion.
posted by Dragonness at 10:46 AM on September 26, 2008

Okay, it looks like we really shouldn't worry about the FDIC then?
posted by Dragonness at 10:54 AM on September 26, 2008

Thanks ersatzkat for the clarification. So basically the people opening the accounts are accepting a lower return on their cd's so they don't have to manage the accounts directly.

Dragonness - the line of credit is currently 30 Billion, but I doubt there would be much hesitation increasing the limit if necessary.
posted by ShadowCrash at 11:03 AM on September 26, 2008

So wait, I have to be white to use this service?
posted by tkolar at 11:57 AM on September 26, 2008

And male, also?
posted by tkolar at 11:57 AM on September 26, 2008

Thanks Mutant and ersatzkat, brilliant post.
posted by whuuuu at 3:49 PM on September 26, 2008