Tag Archives: investment

CDRates

CD Rates Inching Higher Again

Bank-issued certificates of deposit rates are inching up, but if your one-year CD is maturing, you’re probably not going to like what’s being offered. That’s because CD rates took a dramatic drop in the past year as the Federal Reserve marched through a series of reductions starting last summer. The downward spiral was triggered by a belt-tightening credit crunch and a pervasive housing downslide.

Rates plunged as much as 325 basis points in the past year, dropping to as low as 2 percent from 5.25 percent.

Early last summer, it was not uncommon to see banks offering 5 percent interest or more on certificates of deposit. Then came the steady stream of rate cuts, and CDs were paying in the neighborhood of 2 percent. Now we’re seeing rates flirting with 3 percent, and teasers that are a tempting couple of percentage points higher.

Does the move to higher ground indicate that an economic turnaround has begun? Not necessarily, say banking experts.

“Rates are down considerably from what a consumer could have gotten last summer,” says Herb Kaufman, professor of finance and vice chair of the Department of Finance at Arizona State University’s W. P. Carey School of Business. “Now they’ve come back a little bit. They’re trending up as banks try to rebuild their deposit base and retain the deposits they have.”

Kaufman and Rick Robinson, regional investment manager for Wells Fargo Wealth Management Group, agree that one of the reasons for the modest increase is the perception that the Fed is not likely to reduce interest rates anytime soon. Another factor is inflation.

Robinson says the Fed is taking a wait-and-see approach to determine how the economy responds to seven rate cuts and whether inflation will remain somewhat subdued or will increase.

Kaufman notes that inflation, fueled by gasoline and food prices, appears to be accelerating.

“As that happens — and the feds are very conscious of that — you can expect banks will have to reflect the rise in inflation with their CD rates,” Kaufman says.

A significant improvement in the credit market adds to the likelihood of CD rates continuing to drift upward through summer, Kaufman says. He expects to see CD rates somewhat higher than they were last spring.

Is the inching up of CD rates a good or bad sign for the economy?

“I’d say it’s a little bit of a good sign,” Kaufman says. “It wouldn’t happen if the Feds weren’t comfortable with the credit market. Concerns have eased. Banks are comfortable to bid up rates, which means some of the constipation in the credit market has eased.”

The rise in interest rates could be tied to various factors.

“It’s usually a signal that the economy is beginning to do well or that the Federal Reserve wants to slow down the economy,” Robinson says. “Or it could mean that interest rates go higher because of supply and demand, because of inflationary pressures.”

But Robinson cautions: “A small uptick in rates is not a signal that we’re out of the woods or that economic growth is turning around. I still think it will be subdued in the second half of 2008. We expected low growth for the first portion of this year, and we expect to pick up the pace slightly in the second half.”

Another word of caution for investors: “Some banks might offer teaser rates of 5 percent for three months,” Robinson says, “but when it matures and resets, the rate will be consistent with what other banks are offering. Any bank in Arizona must remain competitive with the bank on the opposite corner.”

The creep upward of CD rates is a good sign for aging investors who rely on income from these investments to maintain their lifestyle. Conversely, the drastic decrease in rates since last summer was hurtful, especially for seniors.

“There is less money in their pocket,” Robinson says. “As their CDs matured, if they reinvested their money they’re more likely earning less than they earned previously. They have less to live on.”

Kaufman, too, says the increase is a good sign for retirees, so long as the rise does not pose a threat to economic recovery. Because of the roller-coaster ride the stock market has been on, some investors seeking a safe haven switched to CDs covered by the FDIC.

The collapse of investment bank Bear Stearns & Co. in March spawned some movement to CDs and safer, less volatile investments, including government-backed bonds. Robinson calls it “a flight to quality.”

“In the summer of 2007, banks went through a confidence crisis,” Robinson says. “Investors were worried. Some banks experienced an outflow of deposits, given investor concerns over their viability. That concern seems to have lessened. As the crisis grows longer, more information becomes available, which lessens the panic. People can understand the viability of their institution.”

The reason for the subtle increase in CD rates is anybody’s guess.

“Some banks might be willing to take a loss on deposits to shore up their capital base,” Robinson says. “They may want to increase deposits because they see opportunities to make loans. There are myriad reasons why rates go up, fluctuating in small increments of five to 10 basis points. It could be strategic or market related.”

Bad business partners

What To Do When Bad Business Partners Happen To Good People

“He is robbing you blind.” Business owners are never emotionally prepared to hear these five words, but they should be poised for action to protect their own interests and those of their companies’ when business relationships turn hostile.

Recently in Arizona, the owner of a residential property rental company found this out the hard way when she was told by a former employee that the manager of her company’s 150 properties was stealing from the company. A widow nearing retirement, she had made a series of business mistakes, including giving the manager stock in the company without proper legal documentation, as both a reward for past service and to motivate and compensate him for future work. The once loyal employee began to take control of the owner’s $25 million investment under the guise of “handling the details” of the business. He took control of the accounting software program, the company credit cards and kept details from the owner by misinforming her of the time for meetings with the company accountant. She was dumbstruck when she received the phone call from the former employee, but, on reflection, it all made sense. Her business acumen for finding deals on distressed properties and turning them into rentals had not prepared her for the complexities of dealing with a business divorce. As a business owner you need to protect yourself. The following provides some tips you should keep in mind if you believe a business divorce is imminent.

Gain Control
When there is a shift in the business relationship, as owner your first step should be to get back your position of power. You will need to separate yourself immediately from the person causing the conflict in your business. In this case, the property owner fired the manager, changed the locks on the doors, cancelled credit cards and changed passwords to all the computer systems. You will need to take this even further to protect your intellectual property and files. Talk to your IT and file room staff about securing access and tracking of information and control of passwords.

If you are fortunate enough to have your company running well today, this is the perfect time to make sure confidentiality policies are in place and have a lawyer review your company documents. It makes more sense to manage risk and resolve conflicts before they start to touch your bottom line.

Stop Talking
It is tempting to unload your frustrations on your accountant, your tax advisor, other employees and even your next door neighbor. But the truth is those comments could come back to cost you money, leverage and possibly your business reputation. While there are some exceptions, as a general rule, conversations you have with someone, other than your lawyer, can be used in court. Make your attorney your sounding board, confidant, champion and warrior. What you tell your attorney is protected by attorney-client privilege. It is the bedrock of your right to have effective counsel; without it, lawyers could not effectively represent their clients.

Keep Original Documents
This property owner had a bad habit of giving away original documents. When it came time to organize her case, this made the task even more challenging for attorneys, expert witnesses and even business advisers. Making a copy of a document is fine, but make sure you keep the original. Be sure to maintain the integrity of original documents by keeping them free of extraneous handwritten notes. If you write on these documents, you may make your case more difficult. If you want to make a note about a business matter, grab a Post It note.

Hire a Lawyer
You may know your business, but your expertise is in the company, not the law. A good lawyer needs to be the captain of your ship as you navigate a business divorce. Your lawyer may recommend a business adviser to get your company back on track. While this is a “divorce” of sorts, it isn’t the job for a family law attorney; you need an experienced business attorney who has dealt with breakups in the business arena. Get referrals through people you know in the business community, professional organizations or your local bar association. Do not be afraid to ask a lawyer if he/she has ever done this type of work. In some cases, a team of lawyers may be necessary. You may need experience in several different areas to get the matter resolved.

Turning the Tide
How did the widowed property owner fare with her business on shaky ground and her future retirement threatened? Through a mediation process, she was able to regain control of her company and tocarve her co-owner out of the business. The woman is now back in a take-charge position, buying and managing properties. Most importantly, her future is in a more secure place.

Like a marital divorce, a business divorce is never easy but, once resolved, you’ll be able to run the company instead of letting bad employees or unsuitable business partners run you.

Leon Silver and Dan Garrison are shareholders at the law firm of Shughart Thomson & Kilroy. They lead the firm’s Business Divorce team. They can be reached at 602-650-2000.