Remember Allen Stanford, the billionaire financier who ended up seeing his financial empire fall among accusations of running one of the biggest Ponzi schemes in history? Unfortunately, two years after Stanford Financial Group collapsed, investors in Stanford's Antiguan CDs are still waiting to find out how -- and if -- they'll be compensated for their losses.
From Peter J. Henning at Dealbook:
The S.E.C. is pushing for investors who bought more than $7.2 billion in allegedly bogus certificates of deposit from Mr. Stanford's Antiguan bank to be treated as brokerage customers by the Securities Investor Protection Corporation. If that happens, clients could get at least some of their money back.
SIPC provides a measure of protection for customers when a broker becomes insolvent, paying up to $500,000 per customer that includes $250,000 in cash. The program, which is not intended to provide insurance against fraud, only covers the brokerage firm's customers and not those who dealt with an affiliate, like an offshore bank, that is not qualified to participate in the program.
It's easy to see why people were sucked in by Stanford. The gaudy yields on Allen's five-year dollar-denominated CDs, which reached over 7 percent in 2008, a year in which U.S. CD rates averaged around 4 percent, were probably too good to pass up for some. But the fall of the Stanford investing empire and the mess it left behind provide a couple of lessons for CD investors who might be tempted by foreign CDs.
One is that investing in foreign CDs means that if things go wrong, there's basically no one to call. Foreign currency CDs issued by U.S. banks are protected by FDIC insurance, but CDs bought overseas aren't. In fact, few countries the world over can offer the kind of ironclad protection offered by the FDIC, and many don't offer any at all.
Deposit insurance standards vary widely, with some countries providing much less than the $250,000 insurance limit offered by the FDIC, and others providing a total insurance limit per bank, rather than individual protection for each account holder. And even if they do have deposit insurance, many governments won't pay a thin dime of insurance benefits to account holders outside the country, anyway. In the Stanford case, CD investors may get something in the way of reparations because the CDs were sold to them by an American brokerage now under investigation for fraud, but other foreign CD investors who lose money aren't so lucky.
Also, although Stanford's CDs were dollar-denominated, most foreign CDs aren't. That introduces currency risk, which any currency trader will tell you is pretty tough to assess. If you choose to invest in a non-dollar-denominated CD, you'll basically be making a bet that the currency you're buying the CD in will outperform the dollar. If it doesn't, and the dollar rises, your currency losses will probably more than offset any yield you earn.
I worry that in this time of ultra-low CD yields, even some conservative investors will reach outside the U.S. for some kind of a reasonable return and latch on to foreign CDs because they sound similar to the rock-solid deposit products in the U.S. A particular foreign CD may be a sound investment or it may not be, but it's simply not comparable to an American CD, and shouldn't be treated as such by investors.