Savings Are Sexy Again as Banks Fight For Your Deposits

One tiny upside to all this economic mess: as finance firms look to bolster their balance sheets by building deposits, the competition is on for your small-potato savings. Even as Treasury yields touch zero, you can still find CDs and money-market accounts paying north of 3.5%.

After the Federal Reserve slashed a key interest rate in mid-December from 1% to almost zero, 12-month CDs were still yielding 1.92% on average, the same as in April, according to Bankrate.com

What's keeping deposit yields from plummeting along with everything else? Part of the answer is desperation. Among the companies offering the highest rates: GMAC (the financier linked to embattled carmaker GM), Corus (a Chicago bank that has lost a lot of money on construction loans) and AIG Bank (yes, that AIG). Some of the upward pressure on rates also comes from the raft of new bank holding companies--like Morgan Stanley, American Express and Goldman Sachs--that are quickly raising billions of dollars in deposits now that their traditional sources of funding, like commercial paper, have dried up. "These companies are content to pay 3% all day long," says Richard Hofmann, an analyst who covers financial firms at the research outfit CreditSights. (See the top 10 financial crisis buzzwords.)

Smaller banks often have no choice but to keep up--even if it means less profit. "People aren't going to bank with us because we're the highest rate on the street, but if we're too much under the market, they'll leave," says Steve Andrews, president of California's Bank of Alameda. Andrews has had to price more aggressively than he'd like to as one flailing competitor after another, from IndyMac to Washington Mutual, has raised rates in an attempt to attract deposits and stave off collapse. WaMu was offering up to 5% on 12-month CDs just before it was seized by regulators in September.

Before you hop into a top-yielding CD, make sure you're under the FDIC limit and will be the entire time you're invested. Right now the ceiling is $250,000, but it reverts to $100,000 on Jan. 1, 2010. If you're wary of putting money in a firm that might be teetering, one option is to take the rate it's offering and ask your local bank to match it. (Most branch managers have some leeway.) Another tactic: look for CDs that mature in nonstandard time periods, like 15 months, since they often pay more as a way to reel in new customers.

Of course, this all assumes you have some money to set aside for a while. Pull out too soon and the penalty could be more than the interest you've earned--a quick way to turn a good deal into a bad one.

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