UPDATE 11 October 2008: although I stand by the majority of this article, my conclusion has changed. Given recent actions by the UK government it is my opinion that savings are as safe in Egg (if you are a UK resident) as any other UK bank.
Egg Savings caused a stir back in the 90s with their internet only savings account that paid (if memory serves) 6% when others were all nearer 5%. It was new, modern and friendly and all of us young internet friendly types flocked to them with our savings. That, of course, was a classic customer acquisition strategy. Just like MBNA entering the UK market with credit cards that were much cheaper than the competition. Go in with a killer product then expand your range and cross-sell other products to your new customers to recoup your money.
Now it’s a different story. Now it seems that those offering the highest interest rates may well be the ones that are most desperate for our money. The ones that can’t buy at a decent price on the money markets which, to be fair, is not uncommon.
I mentioned previously that Egg was sold off by Prudential to Citibank in 2007. It wasn’t a fire sale but it certainly was going cheap. I know sometimes we don’t like to think of companies earning huge profits because it feels like we must be paying too much for their products or services but actually if they don’t make a profit then they won’t be around long! Making a profit is good for the company and the consumer as long as its not an outrageous amount (leaving aside the obscene amounts some banks have been pocketing).
So, not doing that well and eventually sold off to Citibank. Now Citibank has lost a fair amount in the recent troubles and is looking far less solid than it did. They were very active in the rather dodgy credit default swaps (CDS) market. Credit-default swaps are contracts issued to cover potential losses on corporate debt, bonds and mortgage securities. AIG suffered an $11 billion writedown on its CDS holdings. The CDS market is in a real mess – these insurance contracts can go through multiple trades so that when a default occurs the insured party doesn’t know whether or not the holder has the resources to cover the default. I saw this on Bloomberg:
The $62 trillion market for credit- default swaps, created to protect banks from loan losses, helped fuel a near-meltdown in the financial system and now may be regulated for the first time.
A few points: not regulated!; $62 trillion!; and an ailing $700 billion rescue package. The credit default swaps issue could be much bigger than the sub-prime mortgage market trouble. Essentially what is happening is that the banks are over-leveraged (they’ve borrowed too much) and need to get rid of some of their debts. They will be frantically trying to attract our cash deposits over the next couple of years.
So back to Egg. It’s covered by the Financial Services Compensation Scheme (see earlier posts) so your money is safe up to £35,000 per person. The parent company? Well, I don’t have confidence in any american bank. People have been talking about the risk of Kaupthing Edge and IceSave going bust but if you look at CDS prices you would think the same of many US banks right now.