Little Man's Float

In 1961 First National City Bank of New York pioneered an innovation which has since become as popular as it once was unorthodox: in denominations as low as $500, the bank offered its customers fixed-term certificates of deposit that paid a higher interest rate than is permitted on savings accounts. Now its managers have introduced an even more radical idea for the inflation-harried small investor: notes that would pay a variable interest rate, generally tending to rise with the cost of living. Their plans have kicked up a controversy that prevented the scheduled sale of the notes last week.

The notes would be sold not by the bank itself but by its parent holding company, Citicorp, thus neatly getting around federal regulations limiting the interest that banks--but not bank holding companies--can pay to small savers. For a minimum $5,000 initially, a saver could buy notes on which the interest rate would be changed twice a year. Each time it would be set one percentage point above the going rate on Treasury bills, a favorite investment of the rich. Although the interest rate on Treasury bills can go down as well as up, even in an inflationary environment, it tends to rise as inflation pushes up interest rates. Last week the Treasury rate was 7.5%; thus had Citicorp's notes been sold last week, they would have paid 8.5% initially, v. a maximum of 5% to 5 1/4% on passbook savings accounts. Citicorp intended to sell $250 million of the notes, but potential demand appears so great that last week it planned to offer $850 million of them. Chase Manhattan Corp., holding company for archrival Chase Manhattan Bank, plans a $200 million offering of similar notes, and other competitors are said to be readying as much as $4 billion in notes.

Another Try. The plans, however, ran into stiff opposition. The Securities and Exchange Commission pointedly failed to issue its customary "letter of comment," which evaluates new offerings. Arthur Burns, chairman of the Federal Reserve Board, wired Citicorp Chairman Walter Wriston an appeal to hold off the note sale for two weeks so that Government officials and Congressmen could study "the economic and financial implications of this novel type of issue."

The critics' fear is that issuance of the notes would tempt depositors to pull more money out of savings and loan associations and mutual savings banks (generally called "thrift institutions"). This would further cripple the housing industry, which depends heavily on mortgage money advanced by those institutions. Even AFL-CIO President George Meany, worried about jobs in the construction industry, joined the chorus of criticism. Citicorp held off the note sale, though it may try again this week.

The dispute illuminates several aspects of the money squeeze now afflicting the U.S. It illustrates the lengths to which banks and their holding companies are willing to go to raise the funds to meet clamorous loan demand from business, and spotlights the plight of the thrift institutions in competing with commercial banks for savings in a tight market. Last week the National Association of Mutual Savings Banks reported that its members suffered a net savings outflow of $350 million in June.

Fortunately, some compromises are possible. At week's end, after consulting with Burns, Wriston said Citicorp would make its notes redeemable only after two years; formerly, he had intended to let buyers cash them in twice a year. The longer maturity would make the notes somewhat less competitive with savings accounts, from which money can be withdrawn at any time. Earlier, the Federal Reserve sent a letter to Democratic Senator William Proxmire of Wisconsin, a member of the Senate Banking Committee, telling him that strengthening the thrift institutions "might be preferable" to prohibiting innovative issues such as Citicorp's. One way to do that: allowing the savings banks and S and Ls to issue variable-interest notes too.

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