A Friend at Chase

The Chase Manhattan Bank, which loves to portray itself as the friend of borrowers big and little, last week played that role to the hilt. The bank, the nation's third largest, cut its prime rate--the interest charge to its best business customers for loans -- from 61% to 6%. The repercussions were plentiful, and in part acrimonious.

Wall Street reacted happily. Encouraged by the prospect that falling interest rates could lead to a new burst of corporate expansion, investors bid stock prices up to a new high for the year. The Dow-Jones industrial average rose 7.83 points in a day to reach 938.28. At that level, it had climbed 68.63 points from its Aug. 9 summer low; it stood only a shade below its 1967 peak of 943.08. Standard & Poor's 500-stock index inched up 0.35 points to its own 1968 high of 102.59.

Choosing Sides. Yet that rally faded quickly. Next day dozens of other big lenders, led by Chase's archrival, Manhattan's First National City Bank, pointedly cut their prime rates by only half as much, to 61%. Only a handful went along with Chase. By such action, commercial banks took sides for a most un-bankerlike battle over the cost of business borrowing. The struggle confronted Wall Street with renewed uncertainties. When the exchanges reopened after a regular Wednesday trading holiday stock prices went down, only to come back a bit at week's end and to close at 933.80, a 9.38 gain overall.

The market's N.Y.S.E.'s performance reflected another lively argument--the one among securities analysts about the market's actual strength. Those of bearish mind argue that higher income taxes will shortly begin to quell the consumer buying spree that has kept the U.S. economy humming. As evidence that there is little real steam behind the market surge, they cite the fact that trading volume on the Big Board has slipped below its spring torrent. The bulls point to such rosy predictions as last week's forecast by the National Association of Business Economists that the economy faces only a "brief hesitation late this year and early in 1969." Moreover, say the bulls, so much money is pouring into the coffers of institutional investors that they will be forced to step up their stock purchasing. Somewhat surprisingly, mutual funds actually sold off some $124 million worth of stocks during August, despite the market rise. According to figures from the Investment Company Institute, the selloff lifted the mutuals' cash reserves to $3.5 billion, or 7.1% of fund assets. Mutual funds generally keep only 5.5% of their resources idle.

The split over prime rates amounts to a replay of a 1967 battle between the same two banks. In January of that year, Chase cut its prime rate by a full 1/2% (to 5 1/2%) and firmly held its ground despite outraged cries from other bankers and a counterpunch by Citibank, which reduced its rate only 1/4%. Still, almost everybody finally fell in line with Chase--a victory that earned the bank considerable prestige for sound and shrewd judgment. As to why other banks failed to follow the lead again last week, Chase Vice President and Economist William Butler says: "They're chicken. We're not in the habit of being wrong."

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