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.