Business: Savers' Bonanza

A $10,000 hot ticket

Southwest Bank in St. Louis is no financial leviathan, but its starchy chairman, Isaac Long, 79, likes to throw his weight around when it comes to interest rates. In 1974 Long's bank (assets: $150 million) became the first in the nation to cut rates after nearly a year of steady increases. Last week he was out in front again. He chopped Southwest's prime lending rate to its most credit-worthy borrowers a quarter-point, to 11.5%, touching off speculation that a climb of almost two years in the prime might soon end.

Even with interest rates at near record levels, the nation's inflation-heated economy keeps puffing along anyway, and bankers fear that lowering rates right now would make inflation worse. At week's end only Chase Manhattan and some small banks had followed Southwest's lead. Federal Reserve Chairman G. William Miller, whose tight money policy is a key reason that rates have been rising, told a congressional committee that he would not be surprised to see rates remain high for some time.

In fact, for many Americans, today's high rates have become a bonanza. The reason: since June, banks have been offering money market certificates. These are six-month time deposits that pay interest equal to—or when sold by a savings and loan, a quarter-point better than —what the Government has to offer to sell its six-month Treasury bills. And while regular bank certificates of deposit normally cannot be had for under $100,000, MMCs sell for as little as $10,000; many people have switched their savings to them.

Their popularity has soared along with T-bill rates, which have climbed from 7.75% in June to a high of nearly 10% in January, although lately the rate has eased back slightly. Already MMCs account for a startling $80 billion in deposits, and some bankers are wondering whether they were such a good idea. Their purpose was to keep banks flush with mortgage money, which dries up when interest rates rise and people begin emptying out savings accounts to buy high-interest bonds. While the MMCs have prevented that from happening, they have also led banks into a tight profit squeeze, since they have had to pay more for their money as T-bill rates climb.

Unlike commercial banks, which can cover their costs by making high-interest installment loans, savings and loan banks are restricted to mortgages. In New York, Pennsylvania and other states that have usury laws, mortgage-rate ceilings are now lower than the rates banks have to pay on the MMCs. As a result, some S and Ls have begun using the cash they have received for MMCs to buy certificates of deposit paying 11% or more.

If the profit squeeze becomes too severe, the Federal Reserve could decide to put a cap on MMC rates, but an outright ban seems unlikely. Rates are bound to come down eventually. More important, scrapping the MMCs would simply send depositors right out the S and Ls' doors again.