I have discussed structured notes at some detail in earlier articles on this site, including this article which was published in 2011 when major banks began offering structured notes again in earnest following the 2008-2009 banking crisis and this article which was published in June 2013 when JP Morgan began to offer its 15 year dual hybrid structured note after a year long period in which long term interest rates were too low for it to fund these operations.

Structured notes are effectively unsecured bank debt with certain conditions that enable the bank to gross up the return that it is offering. Essentially, the bank is selling options against the capital it raises in order to fund a much higher return on the offering than where its unsecured debt might be trading. The return is also higher because the bank has an option to call the note at par quarterly after the first year. In short, I believe that structured notes often represent a good opportunity for investors to pick up yield by taking on negligible risks and I myself generally invest certain amounts of capital in these notes intending to hold them to maturity.

The JP Morgan notes, which it routinely issues and calls Hybrid Range Accrual Notes, only pay interest during those periods in which 6 month LIBOR rates remain between 0 and 6% and the S&P 500 falls by no more than 20% from its level at closing. My June article discussed the risks involved in these contingencies and the real risk that interest might not accrue for long periods while these notes are outstanding.

The most remarkable thing about the latest issue obviously is how much more interest JP Morgan Chase is prepared to give than when it issued the very same notes in June. The June notes, which were identical in term and in conditions, were offered at 6.50% (on closing the price was set at 6.65%). It is now clear that an investor would have been much better served to settle for 0.85% in a savings account for the last 2 and half months than to have locked into a 15 year note that is now trading around 90 cents on the dollar.

In an environment where the 10 year Treasury is now trading close to 3%, but will very likely be trading between 4 and 5% in a year, investors should be very careful before locking into structured notes, just as they should before locking into any bonds in a fast rising interest rate environment. While the opportunity to make 7.50% on a fixed income investment seems very attractive in the current low rate environment, my guess is that JP Morgan Chase and Morgan Stanley will very shortly be offering similar notes with coupons north of 8% and with conditions that are less likely to cause interest payments to be halted (such as a LIBOR period between 0 and 7% or 0 and 8%, instead of 0 to 6%).

Prudent investors will find that rising interest rate environments like this are a good time to hold cash and you will find the best rates on cash by clicking on the savings tab above.

Those seeking more information on this offering can find it under CUSIP 48126D6Z7.

Brokers at several large investment banks today began syndicating a 6.50% syndicated structured note that will close later this month. The note, which pays quarterly, is conditioned on (a) 6 month US LIBOR being greater than 0 and less than 6%, and (b) the S&P falling by no more than 25% from its close date of June 28, 2013. Interest will not accrue on those days where these conditions are not met. The notes have final maturity in 2028 and are callable in 5 years.

Bank-issued structured notes should not be viewed as an equivalent to placing money in a savings account or even in a CD. They are much more similar to a bond and can fit well in a portfolio designed to generate income with low risk. Ordinarily, structured notes provide much higher yield than you can otherwise obtain on a similar credit. The holder receives the higher coupon as consideration for assuming the risks of the payment conditions.

Under these circumstances, the holder of the notes is prepared to forego interest if the stock market should come down and remain dramatically below its current levels or if 6 month LIBOR were to spike dramatically above current levels.

6 month LIBOR, of course, is not likely to spike from its current exceptionally low levels to a level above 6% at any time in the near future, but it is very likely to head there at some point over the next 15 years. It was consistently above 6% in the late 1980s and early 1990s, and again in 1994 and 1995. It was also intermittently above 6% in 1998, in 1999 and in 2000. It approached but did not cross 6% in June of 2006. In a normalized environment, it could easily get to that level again, and in a very high interest rate environment these notes could easily be rendered free of any obligation for JP Morgan Chase to pay interest for long periods of time.

Therefore, these notes may play a role in a portfolio, but are not an alternative to cash. My advice is that investors put 10-20% of their non-equity liquid asset base that they cannot afford to lose in the highest quality (i.e., JP Morgan issued) structured notes and/or municipal bonds while long term interest rates have spiked up. This will serve as a partial hedge against savings and CD rates continuing at such a low level for a significant, continued period of time.

Those interested in this particular note should search CUSIP 48126DX61/US48126DX615.

They say everything in life is negotiable. So, with that in mind, I decided to see just how far I could get trying to negotiate a better rate at the bank.

To start, I had some money that I wanted to keep safe over the next 12 to 18 months. That meant no stock market or other risky investment. Before approaching banks, I took a look at the best online rates to serve as a benchmark and a negotiating lever. I also felt a bit pessimistic. Because banks are awash in cash following the financial crisis, now is a particularly difficult time to ask them for extra yield or perks. But I wanted to try.

As a first step, I contacted several banks via media query to see if they wanted to talk about negotiating with customers. Charlie Crawford, CEO & Chairman of Private Bank of Buckhead provided some useful insight. He told me that:

“Consumers should know that most financial institutions, and particularly those with a high-touch service model, are looking for a "total relationship;" that is, your bank wants to hold your accounts and help you with other products, but it also wants an opportunity to lend you money, whether that is through an SBA or other business loan or for an automobile or home loan. Rate shoppers who have a CD at one bank, a checking account at another and a mortgage at yet another may not actually save money because they are not taking advantage of a *total banking relationship* in which a banker who actually knows them tailors a menu of services just for them and works with the client to ensure a "win" for all parties on an ongoing basis. If a banker can work with a client on that total relationship, they may be more apt to waive fees wherever they can.”

In other words, the more business you bring a bank, the more they will reward you. This is called relationship banking.

According to Mr. Crawford, “there is room to negotiate with a bank if rate-shopping on one product is not your ultimate goal. But if you are just trying to get the best rate on one product (say, a CD) without looking at the big picture - the total-banking relationship I talked about - a bank likely will not be able to work with you on fees and such.”

Testing Negotiation Out in the Field

As a second step, I wanted to take the money I wished to deposit, and shop it around to see what banks would be willing to pay. I visited three banks –a small community bank, a medium sized regional bank, and a mega-bank.

For each of these banks I told them I had money to deposit, I wanted to keep it safe for 12 to 18 months, and that I had already researched rates for the online banks.

Community Bank

The community bank was eager for my business and thought that a special 15 month CD would be the right product. The CD rate, although high for brick-and-mortar standards, was significantly below some of the best online savings rates, nevermind the top CD rates. I brought this up and asked if they would be willing to negotiate the rate. I also told her I had a personal account which I’d be willing to move (true) and a business account (true). She first tried to convince me that opening an online account was not the best option for me because I didn’t have access to my money. For some people this might be a valid concern but I am comfortable online and don’t mind sending my cash into cyberspace. Then, she did tell me that if I deposited enough money and brought my personal and business checking accounts over, she could get her regional manager to discuss the rate. Bingo. I didn’t want to escalate the conversation yet, since I was still in research mode but at least I knew there was an opportunity to negotiate.

Overall, speaking with her was a very pleasant experience and I appreciated her willingness to entertain a negotiation based on what I brought to the table.

Medium Sized Bank

The medium sized regional bank could not compete in any way with the online rates. The banker made a half hearted effort to convince me that a local bank was better than online. She told me that if I wanted to get an “online like” rate I would need to speak to their investment advisor. Of course, investments usually mean a potential for loss and so I was not interested in that. No negotiation. She did try to sell me a checking account and home equity in the process though.

Mega-Bank

I walked into the mega-bank, sat down with the Assistant Branch Manager and told her my story. The bank’s rates were extremely low. I told her the online rates and she smiled and told me that they can’t come close. Game over. I asked if they negotiate – no. I told her I’d be willing to consider bringing them more business – no. She was very polite but it was clear that nothing I could do was going to get me a higher rate.

Bottom Line: Banks aren’t desperate for your cash so they are not eager to negotiate. They do want your lending and checking business so that is the leverage you have. And based on my three bank sample, the smaller banks seem more willing to negotiate than the bigger banks. The mega-banks – forget about it.

Have you negotiated successfully with a bank? Do you have any useful tactics? If so, please help the community and share them below.

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