If your bank is bought, your CD yields could be slashed

People who hunt for high-yielding bank savings certificates assume they aren't taking any risk if they stay within federal deposit insurance limits.

But there is one risk: If your bank fails and is bought by another institution, the acquirer isn’t obligated to honor the failed bank’s savings rates. You may be told you’ll either have to accept a lower rate or take your money elsewhere.

Depositors of Culver City-based Alliance Bank found this out the hard way. Alliance, which had $951 million in deposits, was seized by the Federal Deposit Insurance Corp. on Feb. 6, and was sold to California Bank & Trust of San Diego.

Late last year, struggling Alliance had been offering yields of 4% or higher on one-year certificates of deposit -- well above market averages -- as it sought to pull in cash to stay alive.

California Bank & Trust didn’t pay those kind of yields, and won’t now: The bank has sent letters to Alliance customers telling them that the annualized yields on their CDs will be unilaterally reduced to 1.4%.

If depositors don’t like that yield they’re free to cash out, with interest earned to date and without an early-withdrawal penalty.  .  .  .

This has angered some Alliance depositors, who have called or emailed me, protesting California Bank & Trust’s decision.

In the past, acquiring banks often have continued to honor CD contracts for their remaining term. That’s what JPMorgan Chase & Co. did with deposits of failed Washington Mutual last year, for instance.

But a spokesman for the FDIC confirmed that an acquiring bank has the option of tearing up the CD contracts of the bank it buys.

Steven Borg, a senior vice president at California Bank & Trust, says the bank isn’t interested in the kind of hot money that Alliance attracted. He said his company wants a "relationship" with customers -- meaning, it wants its CD customers to do other business with the bank as well.

Alliance depositors who are willing to bring in other business, Borg said, may qualify to retain better yields on their CDs than the new 1.4% blanket yield.

Otherwise, he said, they’re free to go.

With many more bank failures certain as the economy sinks, the Alliance case should serve as a warning to yield-chasers: Though you’ll never lose principal on deposits that are within insurance limits, you could find that the above-average yield you locked in wasn’t really locked, after all.

As CD yields in general continue to fall, you’ll have to decide between the highest yields –- which may not last if those banks fail -– or lower yields that obviously are less attractive but might at least be sustained.

I wish I had more helpful advice, but like a lot else with money these days, yield-chasing is a spin of the roulette wheel.

-- Tom Petruno

Comments

[Bill]

"If depositors don’t like that yield they’re free to cash out, with interest earned to date and without an early-withdrawal penalty. . . ." ------ At least your principal is safe, and the lack of penalty means you can cash out now and shop it around. ----- The reason most people in USA don't save money is very simple. Interest rates paid from banks are wholesale, but borrowings are retail. Banks make money on the spread, which pays for staff, security, office rent, adverts, etc. ----The biggest grinder is the fact every measly penny of interest is reported to the IRS as earned income, and you must pay tax on it. So your net return after inflation is close to ZERO. I read somewhere that money should be regarded as a medium of exchange, not a storehouse of value.

[Neil]

"yield-chasing is a spin of the roulette wheel."
Nowhere near that good. In roulette you know exactly what the odds are and you get to watch the spin and your money.

[Barry Jackson]

It happened to me in 1989. I had a CD with a Houston, TX, Savings & Loan paying around 8 or 9%. I only had the CD a few months when the S & L failed and was taken over by another Institution. Naturally the high interest rate was abrogated. In times like these one should not be greedy and be thankful that one's principal is still intact. Although I seem to remember it can take the acquiring Institution a week or two to return one's balance if the depositor decides not to keep the CD in place.

[Martin Zimmerman]

I, too, was living in Texas (Dallas) in the late 1980s during the S&L crisis. I had two or three institutions fail or merge out from under me before ending up in the embrace of Nationsbank (later to buy out -- and steal the name of -- Bank of America). I remember having a hard time working up much sympathy for depositors who'd been reaping the "Texas Premium" on CDs for many months before the big, bad out-of-state banks rode to the rescue -- and starting paying CD rates in line with the national average. It was a small price to pay for having the rest of the nation foot the bill for a financial disaster created largely by bankers in Texas and a handful of other states.

[Barry Jackson]

Martin, if I remember correctly before Nations Bank it was NCNB - North Carolina National Bank. In Texas people joked that NCNB stood for 'No Cash to No Body'.

[A%20Medici]

If your bank is bought by another, do you at least get the interest earned up to the point of the sale? Or is all interest lost from the old bank?

[Tom Petruno]

@Medici: As I noted: If depositors don’t like that yield they’re free to cash out, with interest earned to date and without an early-withdrawal penalty. . . .

Yes, an acquiring bank should pay all interest earned at least up to the point it takes control of the old bank.

Tom Petruno

[BTN]

If you're looking for better yields, try a California municipal bond ETF.
This one is yielding 10% ! Tax-free!

Ticker is VCV
Its from Van Kampen family of funds.

[M.A. Nupa]

Due to the large number of failed banks in recent months, there's another important issue regarding FDIC insurance your readers need to be aware of.

While it is true an FDIC-insured depositor has never lost money on a claimed qualified account, there is a very important caveat:

If an insured depositor fails to claim an insured or transferred deposit within 18 months after the FDIC initiates the payment of insured deposits, the transferee institution must refund the deposit to the FDIC, and all rights of the depositor against the transferee institution are barred.

The FDIC then remits the insured deposit to the custody of the unclaimed property administrator in the account owner's home state, unless that state declines to accept custody. Upon delivery, the FDIC is deemed to have made payment to the depositor, and all rights of the depositor against the FDIC are barred.

Most states allow claims in perpetuity, but there's a reversion clause. If a depositor does not claim the deposit delivered to the custody of the State within 10 years of the date of delivery, the deposit must then immediately be refunded to FDIC, and all rights of the depositor against the state and the FDIC are barred.

It's important to note that If a state declines to accept custody of the deposit - which they sometimes do - the depositor must claim the funds from the FDIC before the receivership is terminated, or all rights of the depositor with respect to the deposit are barred. Dividends for credits arising from uninsured portions of a deposit may, however, be claimed after the receivership is terminated if a dividend check was returned by the post office for a bad address.

Depositors should also be aware that due to the large number of mergers and acquisitions in the banking industry over the years, it is possible they or a deceased family member might well have an account at a failed bank and not know it. (Transferred accounts are typically insured separelty for six months after the transfer.)

Finally, unclaimed safe deposit boxes at closed branches may be drilled and the contents sold at auction just weeks after closing, so prompt action is advised.

Details on individual failed banks and respective claims procedures are available at: www.failedbankreporter.com

[Bill]

No biggie. At least I get my principal back. Ask Madoff investors if that's a good deal.

[W Thomas]

In my case the rate was cut from 3.9% (the going rate when the CD was purchased) to 1%. So elected to ask for my principal back. The broker informed me that it will take from 2 to 6 weeks, and would not put anything in writing i.e., no written confirmation.

Called another disinterested broker and they said like the first broker they also were not put anything in writing. Clearly the brokers know something that they are unwilling or can't share with their customers.

Reading the FDIC guarantee: Time line for return of principal is not defined i.e., can be indefinite.

New definition of insurance - You will get your money back but we just can't say when!