January 2012 Check In On Ally Demand Notes

I’ve written a few posts about the safety of Ally Demand Notes.  I’ve had a few readers ask whether I still feel that they’re safe, so I thought I’d check in with an update.

mb-201201checkcalcFor those who aren’t aware, Ally Demand Notes are an unsecured money market type account that currently pays 2.25% interest.  Because it’s unsecured, the holdings are not covered under FDIC insurance laws, meaning that it’s not like a traditional bank savings account.

The upside is that it pays a rate of over double what you’ll find virtually anywhere else.  If you’re willing to take the risk, and you qualify to participate (you have to work or have a relative who works for GM or Ally), it can be a good place to earn some extra money on your cash savings.

Before the financial meltdown of a few years ago, my cash savings were exclusively in the Demand Notes account.  When the meltdown started, I got nervous and opened an ING Direct Savings account, and began shifting money from the Demand Notes account to the ING account.  At one point, I probably had over 80% of my cash savings in the ING account.

Once things seemed to settle down and there were no ill effects to the Demand Notes account, I began slowly shifting money back over, especially when ING was cutting rates left and right (they were under 1% last time I checked).  At one point, I probably had 75% in Demand Notes, so I was pretty close to where things were before I opened the ING account.

Recently, I actually shifted a little back over to ING to get closer to a 50-50 split.  The thing I was keeping an eye on the most was the potential bankruptcy of ResCap, which is the mortgage subsidiary of Ally.  The reason this made me a little nervous is because the Demand Notes prospectus indicated that one of the potential risks of the Demand Notes holdings was tied back to ResCap.  It indicated that a portion of Demand Notes was tied back into ResCap, though it was pretty vague about how much.  Since Demand Notes is primarily used to provide cash for the auto lending arm of Ally, I didn’t figure that a potential ResCap bankruptcy would wipe out very much of the value of Demand Notes, but it was a definite possibility that some could be eliminated should ResCap had been put into bankruptcy.

I just read that Ally confirmed that ResCap will not be going through the bankruptcy process, which makes me feel a lot better and seems to reduce the chances of any effect on Demand Notes.

At this time, I don’t feel the risk is high, but because of some of the continued uncertainties, I plan on no more than 50-75% of my cash holdings in Demand Notes.  Required disclaimer: This is just my personal opinion and strategy and in no way constitutes professional financial advice. You should consult a qualified financial adviser (of which I am not one) if you require further input or information.  I am in no way responsible for anybody elses decision related to this matter.

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14 thoughts on “January 2012 Check In On Ally Demand Notes

    • I know. I just logged in today and saw that they knocked it down AGAIN, the second decrease in just around a month. Not good, ING!

  1. I think your strategy so far is a great idea; you obviously have to do what you’re most comfortable with! I, like Jeff, had no clue about these accounts–I wish I had access to this because I’d definitely be taking advantage of their benefits!

    • It’s only a few bucks a month in interest difference, but it’s still nice versus the pennies you get elsewhere!

  2. Good luck with this strategy. It’s hard to find anything paying a guaranteed 2 to 3%. I suppose for a little more risk you could get the same or slightly better returns by buying a bond mutual fund or buy some very plain vanilla dividend stocks. But risk defeats the purpose of investing your emergency cash.

    • I typically don’t like investing money that I want for cash reserves into the stock market. While the Demand Notes account holds an element of risk (that I continuously mitigate by balancing with the ING account), the rise and fall of the stock market is too much risk to bear for these funds. I’m sure even those ‘vanilla’ dividend stocks got diced and sliced during the last market drop.

  3. I won’t do business with Ally Bank because they still have not paid their TARP back. That to me is not a good sign of stability nor reliability. Having said that, I know the returns on savings is terrible.

    My wife and I are attacking this problem in a different way… We are using a debit rewards card by PerkStreet. It is 1% cash back ($50 redemption tier) or 2% cash back if you maintain $5k a month. Instead of investing $5k, we keep it in our bank account and spend on our debit card. That is providing better returns for us than putting it savings. It also meets our need for liquidity and zero risk.

    I have some other funds parked in Betterment, but it is stock & bonds, so the risk is higher. You do get $25 for initial sign-up so you can park it there, hope for the best, and pull out if you go below the $25 bonus! ;)

    • Thanks for the tip. While Ally hasn’t fully paid their money back, they have paid a portion back and I’m hoping they pay the rest back soon. Some of the other institutions that received TARP money have not learned a single thing (looking at you, Bank of America) but Ally has seemed to actually take the opportunity of a second life to implement some better practices that are customer friendly.

  4. http://www.reuters.com/article/2012/02/17/us-ally-idUSTRE81G04G20120217

    Have you seen this article on Ally looking to sell? This makes me nervous as the government owns more that 70%. What if no one wants to buy them? I’ve been a long time Demand Notes investor and did exactly what you did in the melt down. Ally has a subvention relationship with GM and Chrysler, but those contracts are coming do and GM has started it’s own financing arm and many lenders are currently negotiating to get Chrysler’s business. What do you think?

    • I have seen that. I don’t think a possible sale or IPO would affect their current business so I don’t see this making Demand Notes any more or less risky. Quite honestly, I would hate to see Ally get swallowed up by a bigger bank. Ally has done some pretty cool things in the financial sector, becoming quite customer friendly. Whether that’s a product of the government ownership, I’m really not sure. If Ally was purchased by a bigger bank, I would honestly expect Demand Notes to go away, with the balances transferred to a normal savings account, presumably at market rates.

  5. Ally now claims over and over they are not tied to RESCAP. Does that make anyone feal better sleeping at night re: Their Demand Note balances?

    • I haven’t lost any sleep over this especially seeing that Ally did write an FAQ about Demand Notes / Rescap, basically as you said, assuring that Demand Notes won’t be affected by the Rescap activities. My take all along has been that, since Demand Notes basically provides short term liquidity to Ally which is then used to fund auto loans, that would make it a safe play. Things in the car market and with the companies that they provide capital to (GM and Chrysler) have been going so well, they’d be foolish to expose any of that to a capital loss. Doing anything to jeopardize that growth and stability would only be shooting themselves in the foot, so I don’t see them going there.

    • That’s the first I’ve heard. Sounds like you know as much as I do!

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