I am not familiar with CDs, but how can an establishment promise returns of 4.75% for 100 years? That seems exceedingly high. What if there is deflation in 2055 or a recession that sends the rates back to 1-2%?
It could be a good hedge for them because if they have a lot of 30 year loans on the books, then they want a lot of low-liquidity deposits in case rates go up and the nominal value of the loans they have go down. 10 years of interest penalty is going to discourage people from withdrawing early. Also, it's probably not a bad marketing gimmick if they aren't going to issue too many of them.
So while this probably works out (especially if there is high inflation or high interest rates for some of the 100 years), I think the upside as a borrower is very limited, especially if this ends up being popular (if interest rates fall to 1% next year and stay there for 100 years, you didn’t get a great deal…you most likely just have a CD in a bancrupt institution).
I mean the simplest answer would be to buy 100-year government bonds, there are at least a few countries that do those.
FDIC insurance would cover the case where the bank went bankrupt. This is a strange financial instrument and I’m skeptical of it, but it’s not outlandish compared to other long held instruments like annuities. There might be some place for it in certain peoples portfolio.
Let’s assume Walden is successful at marketing this investment and it becomes a material part of their balance sheet. Otherwise, this doesn’t matter much.
If rates go up, Walden would print money by earning a spread. The 10-year penalty for early withdrawal is essentially the cap on their upside, and it’s a high cap.
If rates go down for a long time, Walden could become insolvent. At that point, you have to rely on the FDIC’s guarantee to make you whole.
The average rate in the US is currently .6. Bank investors get antsy at .8 (prior to 2008 .9 was considered the line).
It led to the 2008 crash but they learned nothing.
In no way does a bank holding CLOs on their balance sheet validate the idea that they are loaning out their deposits 6x. That simply doesn’t happen with well run banks and people espousing that it does largely don’t understand banking.
I’m just pointing out that doing stupid financial shit that is effectively the same as that kind of over-leveraging us hardly new, nor raised many eyebrows.
Banking trades will seek the most ways to make money possible. Before CDOs were the poison they are today they allowed 50x effective leverage