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Financial Tip: What to Do With Your Excess Cash?

By Bill Scarfia, Chief Financial Officer

If a member company is fortunate enough to have excess cash in today’s difficult economic environment, you are to be congratulated! However, no good deed goes unpunished, and you now must find a suitable, and safe, place to invest those funds. Enter the “brokered CD”.

A brokered CD has many of the traditional characteristics of a normal bank certificate of deposit, with some important exceptions. Like a regular certificate of deposit, it carries FDIC insurance up to $100,000 per institution. It is typically very liquid, and can come in varying maturities. However, the rate offered by the brokered CD can be significantly higher than that of the traditional CD. How can that be? Well, it goes to the nature of the instrument, as we will see.

Banks that need money to lend, or need money to shore up their capital reserves offer brokered CD’s. The need for money to lend can be acute after a natural disaster, as banks scramble to satisfy homeowners who need funds to re-build. One alternative for these institutions is to offer “bulk” CD’s at an attractive rate, perhaps 50 to 75 basis points or more over market rates, to entice investors to buy their certificates.

The “bulk” CD at initial offering may be in the millions or tens of millions of dollars, obviously not something the average investor can afford. But, there is a market for these instruments if they are parsed into $100,000 lots and offered to the general public. That’s what the brokerage community does, obviously for a fee. Broker-dealers will buy these instruments and offer them to the investing public. The investor gets a higher rate of return, the broker gets paid (sometimes with a flat fee or sometimes by taking 10 to 15 basis points off the yield) and almost everyone is happy.

Obviously, the investor will enjoy a higher yield in a typically safe investment product, and will be able to select a maturity date that corresponds to his or the company’s investment horizon. The products are not without pitfalls, however, and the average company should be aware of a number of caveats.

First, the investor will lose the FDIC safety net if he or she has more than $100,000 in brokered CD’s with the same offering institution. (There are exceptions for retirement accounts, but perhaps that is a subject for a different day). The investor should also be aware of any “call” provision in the instrument that allows the bank to essentially repurchase the instrument before its scheduled maturity. Further, while the brokered CD is certainly liquid, the secondary market can be unforgiving if the investor tries to sell the instrument prior to normal maturity. Most importantly, select the right broker and make sure they are reputable. As with all securities transactions, the integrity of the people and the institution you are dealing with is something that is of the utmost importance.  The San Diego Regional Chamber of Commerce website can give you a number of Chamber members who can discuss this product with you.

Visit our website to see how a Chamber member can assist you. Additionally, check out the SEC Web site, www.sec.gov, as well as www.finra.org and www.bankrate.com.