Have you seen the ads for Ally Bank's "Raise Your Rate" CD? Basically, it's a 2 year CD with a yield (1.74%) that's already above well above that offered by the competition (Citi, for example, offers .65%: 65 bps, on a 2 year CD - you have to go to 5 years to get a 1.75% yield from Citi!).
What's the catch? The catch is supposedly in your favor too! The "Raise Your Rate" clause means that, should rates rise, you can, at any time, once and only once, reset your rate to the then-current rate. In other words, should something crazy happen and CD rates spike to 5%, you can say "SHIP IT - I want 5%" and get your rate re-struck to the higher yield.
Now, I ask you, the readers, how do they do this? How do they offer a premium yield as well as a free option for the CD buyer? I asked Ally if there was a prospectus or term sheet available, and was told that you get the details in the mail after you sign up.
Anyone have ideas? I think it's extremely unlikely that rates will rise over this time period, but that's not material to the discussion - Ally is offering a premium rate and a free option. HOW?
And yes - Ally Bank is the Bank Formerly Known as GMAC.
-KD
9 comments:
The free option they are giving away isn't worth much for starters. 2 years we not gonna see higher rates. Plus they not gonna raise 1 for 1 with fed funds from 1.75 starting point, are they?
Fine print will tell ya all ya need to know.
Sounds like ally is on a marketing bonanza with bailout $$$$. Just trying to get a customer base to sell loans too.
Scharfy
Is this a way for GMAC to borrow (from their customers) at lower rates than anyone else would lend to them?
Must be some sort of structured product. Who can say what the trade is? They're probably executing a derivative transaction for a net credit. Rate derivative presumably, but banks are doing wacky stuff these days. They give a small bit of the credit to the depositor as a premium yield, and keep the rest in reserve in case rates go up and their depositors start calling to raise their rates. If rates don't go up, they keep the leftover premium for a profitable trade. All of this, backed by the US taxpayer in the form of FDIC insurance. What's not to love (if you're a banker)?
Or something like that. They're hedged, though, and when you get that prospectus it will say somewhere in there:
'Ally Bank expects to earn a profit from its hedging activities. Any hedging transaction is required to be entered into at a fair price. That is, it must be priced in good faith; on an arm’s length, commercially reasonable basis; and in accordance with pricing methods and models and procedures used in the ordinary course of business for pricing similar transactions.'
(I stole that from a Wells Fargo brochure for their MarketPower CDs :)
One would hope they've positioned their portfolio with out of the money caps, options on digital bonds and other instruments which would benefit.... who know?
They also have only 2 months of interest as penalty if you break a 5 year CD. It pays 2.69%. Whats up with that ?
You can do anything when you are backed by taxpayer fundage!
Is it possible that they are servicing these CDs for other banks for a fee? Also, is it possible because GMAC Mortgage was servicing so many of the bad mortgages/foreclosures of BO of A and Fannie/Freddie? (Disclosure: Mine was one. GMAC/Ally are a bunch of bastarditos.)
Who'd have thunk that the Pelosi strategy for selling Obamacare ("You have to pass it to read what's in it") would carry over to bank products.
Some people are working too hard on this one - Ally has to pay a premium for deposits because they're more or less the worst bank in America. There's no complicated hedging/structuring angle, except that the option to adjust is probably not as strong as you would hope. If I can get 1%+ at ING, Ally is going to have to pay close to 2% to pull in deposits. Every deposit is another chance for management to roll the dice on some more loans and either earn a bonus/request more bailout depending on outcomes.
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