High Yield Savings & CDs at Struggling Banks

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My advice? Skip them.

A few months ago, I opened a Washington Mutual account because they were offering excellent interest rates on both their certificates of deposit and their high yield savings accounts. We’re talking 4% numbers, 5% for the CD, in an period of 3% averages, it was pretty meaty stuff.

At the time, I was focusing on FDIC insurance and how it would protect your funds. Your principal was not at risk. A scant month or so later, WaMu fails. JP Morgan Chase assume the deposits, all of which were insured, and things are as they ever were. Then the online savings interest rate, which is never guaranteed, falls. I didn’t have a CD so I don’t know if the CD rates were honored by JP Morgan Chase but they didn’t have to be.

When a bank fails and is assumed by another bank, with the FDIC as an intermediary, the new bank does not have to honor the former bank’s certificate of deposit rates. The CD is normally a contract but in this particular case, either party can cancel it at will. The new bank can change the interest rate but the CD owner can redeem the CD early without penalty. Sometimes they honor it, sometimes they don’t, it all depends on how badly they want those deposits and at what price. When a bank is struggling, it often increases those rates to get more deposits and the new bank may not want to pay above market interest rates for no good reason.

But, if Bank A buys or merges with Bank B, it must honor all of Bank B’s contracts – which includes CDs. In a failure, Bank B goes first to the FDIC and then to Bank A, which is why they don’t need to honor CDs. If it’s a purchase or merger, they are required to honor them because they purchased the contracts when they purchased the bank.

Knowing what I know now, I’d avoid the hassle of opening up an account with a bank that’s been in the news as having liquidity issues (fortunately none of the big banks left have been in the news for this). It’s a crapshoot as to whether you’ll have your CDs honored (when Citi Wells Fargo acquired Wachovia [I can’t keep these failures straight!], it was a purchase and thus CDs were honored; when JP Morgan Chase “acquired” WaMu, it was a failure and CDs didn’t have to be honored) and the bottom line is that it’s simply not worth it.

I earned an extra percent or two of interest for a few months in return for the hassle of opening and then subsequently closing an account. Not worth it.

{ 7 comments, please add your thoughts now! }

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7 Responses to “High Yield Savings & CDs at Struggling Banks”

  1. Kathy says:

    Wells Fargo bought Wachovia.

  2. jim says:

    You’re right! Thanks Kathy, I get all the failures mixed up. 🙂

  3. Amy says:

    My husband, because he is a Chase customer, got a postcard that offered a $100 bonus for opening up a WaMu checking account. No direct deposit required, free checks, etc. I opened the account with leftover Christmas money the day after we got the postcard. I love free money!

  4. konex says:

    My Wamu CD was honored at the 5% APY rate

  5. Cap says:

    Good to know that they don’t have to honor rates.. never knew that.

    Also +1 to konex for letting us know that Chase is so far honoring the 5% APY rate. Lets hope they continue to do so…

  6. Ken says:

    Even though a new bank that takes over a failed bank can choose to end the CD, they don’t charge you any early withdrawal penalty. So you’ll be paid the full interest at least up to the day of the closure.

    Also, sometimes the new bank will allow you to do an early closure of the CD even if they decide to continue to honor the original rate to maturity. However, for the case of WaMu, Chase did not allow a penalty-free closure.

  7. Thanks for the info on a new bank’s obligations when taking over accounts. Fortunately, Chase seems to be honoring the promotional CD rates for the time being 🙂

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