It's sad but true: Takeover bank can drop your CD rates



Q: The bank that had my individual retirement accounts was taken over by another bank. My IRA consisted of nine certificates of deposits, which were supposed to mature between 1995 and 1999 with interest rates ranging from 7.5 percent to 11 percent.

The new bank has just informed me that in one month all the rates will be adjusted to between 4 percent and 6 percent, depending on the maturities of the old CDs, or the money will go into a variable rate account currently at 3.5 percent. I can also take my money out without any interest penalty if I so choose.

I always thought that CDs were binding contracts and it didn't matter who held them.

Has the new bank got the legal right to force me into a variable account at 3.5 percent? If I transfer my account, is there any way I will be able to get the interest that I now receive?

PTC A: Unfortunately for you, what the new bank has done is perfectly legal. Although you will not lose any principal or past interest, you will not be able to continue to receive the old high rates. In today's market, the best you can do is lock in interest of between 4.5 percent and 7 percent, depending on maturity.

The new bank is truly not forcing you into anything, although you can no longer continue the old CDs. In fact, you are being given two rather fair (but not necessarily attractive) alternatives:

1. Leave the CDs as they were, and receive the new bank's current rates on CDs.

2. Put the CDs into a variable account at 3.5 percent until you decide whether you want to move the money elsewhere. I'll bet the variable account doesn't have any withdrawal penalty. If that's the case, you can transfer the IRA to another bank, a mutual fund or a brokerage firm if you can find a better deal.

The first option is the least hassle. The second is the most efficient if the variable rate account has no penalty for withdrawal and if you wish to shop around for higher interest rates.

The old CD contracts were promises by the bank itself to pay interest until maturity and then return your principal. Since the old bank no longer exists, the promise has lost all financial meaning.

Luckily, the past interest plus principal were insured by the Federal Deposit Insurance Corp., so the only "loss" you have is the discontinuation of the high rates. Remember, FDIC only insures your money, not the promises.

By the way, right now, you can get higher rates on three-year to five-year Treasury notes than are available on many CDs.

Susan Bondy founded her namesake financial services company 1980 to provide financial planning and asset management. She is the author of "How to Make Money Using Other People's Money." Write to Susan Bondy in care of The Sun, 501 N. Calvert St., Baltimore, Md. 21278. All letters will be treated confidentially.

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