The recent wave of bank failures has led many companies to take a closer look at how, and where, they invest their idle cash. After all, nobody wants to wake up one morning and find that the corporate treasure is now sunken treasure, lost aboard a ship that turned out to be leaky.
One way to minimize the risks of rate-chasing is to diversify. That is the strategy of A. R. Eberhardt, chief financial officer at NetAir International Corp., a Denver-based national air charter network. Eberhardt keeps eight separate $100,000 accounts in banks and savings institutions located in Texas, Arizona, and California. Every month, Eberhardt takes the interest earned on the accounts and puts it in another institution. That's because the Federal Deposit Insurance Corp. and the Federal Savings & Loan Insurance Corp. protect deposits only up to $100,000 per account, including principal and interest.
Of course, this approach only spreads the risk; it doesn't eliminate it altogether. One of the institutions may still go under, taking with it a portion of your corporate cash. Even if the money is insured, it can take months to collect on your losses.
Investors can guard against this possibility by conducting a thorough check of a bank's or S&L's four most recent quarterly statements. "If you or your comptroller don't understand the fine print and footnotes, call in your accountant to do it," advises John Wolfarth, manager of financial services consulting in Arthur Young & Co.'s Dallas office.
NetAir goes one step further, using an outside adviser to help pick appropriate banks. Meanwhile, Eberhardt himself has developed his own rules of thumb: The institution must be profitable for a full year and carry a 3% ratio of net worth to assets. Robert Heady, publisher of 100 Highest Yields, a financial newsletter in North Palm Beach, Fla., suggests, in addition, that potential investors speak only to the person in charge of national consumer money-market accounts (or whoever would be in charge of handling your business) and "find out how, why, and with whom the bank is loaning money."
In the end, however, it still comes down to a judgment call. Yes, you may pick up two or three percentage points with a bank account in, say, Slidell, La., or Vernon, Tex. (to cite but two places where banks are currently offering interest rates above the national average). But there are trade-offs. "The function of a treasurer is not only to maximize earnings, but to protect funds," notes Paul Garfinkle, an audit partner at Seidman & Seidman's in New York City. "Is it worth a couple of points in interest to give up an eyeball-to-eyeball relationship with your banker?"