$8 Billion CD Fraud Alleged. What Will You Pay For Risk?
February 24, 2009
When you think about certificates of deposit you surely think about safety, but not all CDs are created equally.
That's the lesson to be learned from the SEC allegation that Robert Allen Stanford and three of his companies for orchestrated a "fraudulent, multi-billion dollar investment scheme centering on an $8 billion CD program."
You have to wonder, why would people spend $8 billion on CDs with an alleged fraudmeister when they could have spent $8 billion buying federally-insured CDs from 7,000 small banks?
The answer, of course, is to get higher rates.
I like higher rates but I'm not interested in just higher rates. I'm also interested in risk and in the preservation of capital. If I can get a higher rate with equal risk you have my attention, but if higher rates also mean higher risk then I want to know more.
Long ago someone advised me to purchase a foreign currency. At the time the interest being paid for accounts in that currency were on the order of 20 percent. That sounds great until you realize that the currency was inflating at about 24 percent a year, meaning that you would be losing about 4 percent of your money when the currency was translated back into U.S. dollars.
Oh, and then there was the matter of the local government. Not too stable...or democratic....
Especially at this time, if a CD is not insured by the U.S. government you're taking on a lot of risk. If that's comfortable for you, fine. But at least know that not all CDs are the same.
For more information, see: SEC Charges R. Allen Stanford, Stanford International Bank for Multi-Billion Dollar Investment Scheme