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

February 20, 2009 |  6:00 am

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

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