How I Timed IndyMac Just Right... Or Did I?

I either timed my investment with IndyMac just right, or at the worst time... I can't decide.

Last summer, when I had accumulated enough money to make significant CD deposits, I decided to test the water by purchasing a 3-yr 2.95% fixed CD with my favorite bank in the whole world, USAA. I figured that the amount I was investing was a small enough amount relative to my savings that I wouldn't have to worry if I needed a lot of cash for a car or house down payment, and why I locked it up for 3 years, I'm not quite sure... again, was just testing the waters.

When I told my dad about my financial decision, he told me that Navy Federal was offering a special deal with 6% yield for 10 months- I'm in! I had gotten comfortable with the idea of CDs, so I purchased a CD at this special rate last July.

Come August, I've become very comfortable with putting my money into CDs, as there is not a home purchase in my near future (will probably be an NYC renter for a while), so I didn't hestitate to find a home for another chunk of change, courtesy of my summer bonus. Navy Federal was no longer offering such great rates, and USAA was competitive, but not as juicy as some other banks out there at the time. The reason why? Because there were a few banks laden with subprime mortgages that DESPERATELY needed some capital.

Last summer was when the subprime mortgage meltdown began (although it had been in the works for years), and several banks were suffering from writedowns on the mortages they had financed. Banks typically package up their mortgages into mortgage backed securities (MBS) that they resell and can be traded on the open market. (See more about MBS here) When the values of the mortgages go down, as they do when mortgages are less likely to be repaid, the mortgage lender has to sell them to investors at a loss. To compensate for the loss of writing down all of the mortgages, the banks then need to borrow money from the Fed to maintain the appropriate level of capital and liquidity. (The Fed will also take steps to make it easier for large banks to borrow money by lowering the rate on the discount window) Banks that are desperate for money will offer the highest rates on their CDs to lure investors to deposit their money. Hey, worked for me!

Summer 2007 was a terrible year for mortgage-laden Countrywide Bank, as indicated by their 5.65% 1yr CD yield, more than 50 basis points (half a percent) higher than the next best yield out there. (I regularly check current CD yields at http://cdrates.bankaholic.com/) I did my research first and learned that FDIC insures CD deposits up to $100,000, which made made me feel better about purchasing a Countrywide CD despite market rumors that the bank might collapse. I purchased a CD from them in August 2007, and since then, the bank has been able to turn itself around and is no longer in such imminent risk of default (that's just my opinion- please regard it as such). And in the meantime, I have been earning a nice 5.65%, with current market rates being an average of 3.75%, and having been much lower earlier this year.

So, given my flirt with danger via the Countrywide CD, I decided to prey on another desperate bank when my Navy Federal CD matured. A quick search on bankrate via the bankaholic link above identified IndyMac as the clear winner with a 4.35% 1yr yield, more than 50 basis points higher than the next best yield. On Thursday, July 10, I did a quick online account activiation, set up an electronic funds transfer, and then left for a long weekend! I really didn't think too much about it, until Sunday when I got a friendly note from fellow PF blogger J. Money with the news that IndyMac had been taken over by the FDIC due to lack of funds. I bought an IndyMac CD on Thursday, and they defaulted on Friday!!! Good or bad timing?

Well, I called the FDIC in a panic in the car while B was driving us home from the beach, and they assured me that my deposit was fully insured because it was below the $100,000 limit. Furthermore, my CD would exist and continue to earn my golden 4.35%, and not just turn back into cash, like I thought it might. (For more information on what the FDIC insures, MyMoneyBlog has a good summary here) Now that the FDIC has taken over IndyMac (once called IndyMac Bank, and now called IndyMac Federal Bank via the FDIC takeover), they will evaluate its assets and try to sell it to another bank. That bank will then either honor my CD at 4.35% or offer me the current market rate, at which point I will be able to withdraw my funds without a penalty before the maturity date. So for now, I am happily earning 4.35% until another bank steps in and decides what to do with it.

Possible outcomes for my CD:

A) If it is longer than a year before a bank buys IndyMac's assets and reevalutes my CD, then I will continue to earn 4.35% until maturity, currently the best rate. (IndyMac is no longer selling new CDs, for now)
B) If a bank buys IndyMac within the year, but rates have gone up, I can reinvest my money at a better rate!
C) If a bank buys IndyMac within the year, but rates have gone down, the new bank does not have to continue paying me 4.35%, and I will have to reinvest somewhere else at a lower rate.

If options A or B play out, then I win! And I timed the market just right, because no other banks are offering 4.35% or better right now.

If option C plays out, then I sort of win, sort of lose, because I will be earning the best rate available, at least for a little while. Then I will be back to where I started, but no worse off.

I will say that the only downside to this situation was the hassle of figuring out where my money was, as the electronic funds transfer took place before I could actually see my funds online, and that made me very nervous. Now it's just a waiting game to see who buys IndyMac Federal Bank, and what they decide to do with my CD.

Also coming up: this year's bonus will be wired to my account late August, and I will be looking for a good place to invest that, too.... I invested a lot of last year's bonus into the stock market, and, well, we all know how that is doing.... :( More on that later!