Nov. 17 (Bloomberg) -- American International Group Inc. and GMAC LLC are among money-losing companies whose banking units are paying higher rates than larger rivals to lure depositors, pressuring bank profits needed to offset rising loan losses.

AIG, the insurer bailed out by the U.S. government, and GMAC, the biggest lender to General Motors Corp. car dealers, are offering yields of more than 4 percent for one-year certificates of deposit. Bank of America, the largest U.S. bank by deposits, is paying 2.75 percent, according to its Web site.

“You have a whole raft of smaller banks out there, some of which are in difficulty, who are paying rates that are bordering on insanity,” James Wells, chief executive officer of SunTrust Banks Inc., said in a conference call with investors Nov. 13.

The fight for the $7.4 trillion in U.S. deposits is intensifying as companies gain retail-bank status and unprofitable firms seek a lifeline during a worldwide credit crunch. American Express Co., Goldman Sachs Group Inc. and Morgan Stanley, which have received Federal Reserve approval to become bank-holding companies, may drive the market even higher by paying more to depositors, said David Hendler, a credit analyst at CreditSights Inc. in New York.

“They are doing whatever they can do keep their business models afloat,” Hendler said. “Everyone has to keep up their rates, but I don’t see how that helps the system.”

GMAC, the Detroit-based auto and mortgage lender, pays among the highest CD rates nationally, according to Bankrate.com, a North Palm Beach, Florida-based research firm. GMAC had a net loss of $2.52 billion in the third quarter, hurt by foreclosures running at record levels and slumping auto sales.

MetLife, Flagstar

Credit-card lender Advanta Corp. is paying rates on par with GMAC, as is Michigan’s Flagstar Bank, which lost $62 million in the third quarter, and Chicago’s Corus Bank, which reported a $128 million loss. MetLife Bank, owned by the biggest U.S. life insurer, was paying 3.9 percent on CDs of $25,000 or more as of Nov. 10.

“Competition for deposits is pretty fierce,” said Joe Belew, president of the Consumer Bankers Association, an Arlington, Virginia-based trade group of the nation’s largest banks. “You have a public that is extraordinarily spooked, from mom-and-pop investors to the international financial conglomerates. Everyone is guarding their positions.”

Hartford Financial Services Group Inc. on Nov. 14 bought Sanford, Florida-based Federal Trust Bank for $10 million to gain access to the Treasury bank rescue. Lincoln National Corp. and Genworth Financial Inc. also plan to buy savings and loans, which may make them eligible for the $700 billion bailout.

Net Interest Margin

Higher rates crimp the spread between interest paid on deposits and how much is received from loans. The so-called net interest margin was flat or declined during the third quarter at half of the 20 biggest U.S. banks compared with a year earlier, according to corporate earnings reports.

“Margin pressures are ferocious right now with lending volume down because business is at such a low point,” said Belew. “Only time will change that.”

GMAC’s deposits have increased 22 percent in the past year to $17.7 billion as of Sept. 30. “We’ve always tried to maintain a diversified funding strategy but in a challenging climate, it’s very important,” spokeswoman Gina Proia said.

American Express operates two banks that have a combined $11.4 billion in deposits, regulatory reports show. “In tough times, it’s even more important to make sure you have a rich diversity of funding sources,” said Joanna Lambert, an American Express spokeswoman in New York.

WaMu, Wachovia

Some pressure on rates was alleviated by the government- forced sales of Washington Mutual Inc. to JPMorgan Chase & Co. and Wachovia Corp. to Wells Fargo & Co. Wachovia is the sixth- largest U.S. bank, while Washington Mutual was the biggest savings and loan.

WaMu and Wachovia were paying unusually high rates, pressuring competitors, Bank of America Chief Executive Officer Kenneth Lewis told analysts last month. Wells Fargo is “a very rational pricer,” he said.

Wells Fargo expects about 20 percent of Wachovia’s $490 billion in deposits to be grabbed by rivals over the next year, the bank said earlier this month. That reflects the higher rates that Wachovia paid to attract deposits since worries over the bank’s stability surfaced earlier this year.

“A key reason regulators pushed Wachovia to sell was that they were screwing up deposit costs up and down the Eastern Seaboard,” said Tony Plath, a finance professor at the University of North Carolina at Charlotte. “A lot of hot money was moving into Wachovia and other banks that weren’t matching Wachovia were getting clobbered.”

‘Problem’ Banks

Some of the 117 banks classified in August as “problem” institutions by the Federal Deposit Insurance Corp. are probably among those paying higher rates, analysts said. The FDIC doesn’t identify banks on the list.

Integrity Bank, a north Atlanta community bank with about $1 billion in deposits, was paying 5 percent interest on 2 1/2 - year CDS on the day before it was closed by regulators in August.

“These banks have to offer a higher rate than anyone else to get over the stigma attached to their names,” said Pete Crane, president of Crane Data, a market research firm in Westborough, Massachusetts.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net.

Last Updated: November 17, 2008 00:01 EST