Silicon Valley Bank subsidiary SVB Asset Management writes in its most recent Observation Deck newsletter "The Trouble with CDs." President Adam Dean, says, "Faced with zero client appetite for their high-payout products such as mortgage backed and auction rate securities, the broker business suddenly isn't what it used to be. Their clients now demand ultra-safe investments such as money funds and treasuries, and frankly, those don't pay much. Enter the Certificate of Deposit and CD placement programs."
He continues, "For corporations looking for safety and return, CDs may sound like the best of both worlds. But there is, of course, more to the story. Aside from the FDIC coverage, very little else about the higher yield CDs offered meets the liquidity, transparency and safety standards of a conservative cash investment policy. In other words, there's a reason for the higher yield, and with a considerable payout to the broker selling that yield, there is at least one reason you are hearing about this CD."
Dean warns, "Typically these higher-yield offerings are non negotiable, meaning they cannot be liquidated prior to maturity without penalty and subject the investor to magnified interest rate risk.... Every security type permitted in your corporate investment policy should include the ability to easily sell back into an open market on demand and without incurring an early withdrawal penalty prior to maturity. Non negotiable CDs don't meet this standard. We recommend allowing only negotiable CDs."
He also advises due dilligence and caution with CD placement programs, like CDARS. "[A]n ability to accurately assess their [banks] health requires a considerable investment in time that the selling broker has almost certainly not done for you. In the event of bank failure, the failure and the FDIC takeover process can often remain invisible to the client. The selling broker has no obligation to notify the client. We recommend allowing only direct investment in CDs where your corporation is the beneficial owner and the issuing bank is approved by the credit team of your asset manager."
Finally, Dean says of CDs, "If they are offering a rate well above market, ignore the FDIC insurance and look at the bank's actual credit rating.... If not convinced, envision the conversation with your board when explaining that the regional bank that you bought the CD from has collapsed." He adds, "Lastly a note about CDARS.... If one of the underlying banks, or the home bank, is taken over by the FDIC, it is unclear as to when your investment is returned to you."
