All Savers Dud

Slow sales for certificates

The much heralded All Savers Certificates were supposed to bring an avalanche of deposits into the nation's desperately troubled savings institutions. Yet sales at both commercial banks and savings and loans are turning out to be somewhat of a letdown. Since they became available on Oct. 1, only about $40 billion worth of the new certificates has been sold, and $15 billion of that amount rolled in during the program's first week, when banks pressed an advertising blitz promoting them. Treasury officials now estimate that total deposits over the one-time-only, 15-month life of the program may wind up no higher than $100 billion, which is far below the $250 billion originally projected by the banking industry. Says a top Treasury Department official: "Sales of All Savers are drying up quickly."

The All Savers Certificates, which bankers had hoped would help their industry stay competitive with the high interest rates offered by money-market funds, give depositors up to $1,000 tax-free interest ($2,000 for a couple) on one-year investments. The notes carry an interest rate equal to 70% of the prevailing one-year Treasury-bill rate at the time the customer makes his deposit. Yet no sooner did the certificates become available than interest rates on one-year Treasury bills, as well as on other short-term investments, began to slip sharply and erode their appeal. Last week depositors could get a maximum tax-free yield of only 10.77% on All Savers, which is below the 12.61% paid in early October or the 11.75% to 13.75% that longer-term tax-free municipal bonds now offer.

It is also doubtful that even the certificates that have been sold are helping banks by bringing in new deposits. Officials at New York City's Citibank, the second largest commercial bank in the nation, estimate that much of the money flowing into their All Savers accounts is coming from Citibank customers converting their high-yielding six-month accounts of $10,000 or more, which currently pay 13.7%, into All Savers accounts. There is no penalty for doing this, and depending on the customer's tax bracket, the return may be higher.

Banks welcome such shifts since it helps them to save on the interest that they have to pay to depositors, but it does not mean any new cash in their vaults. Moreover, many customers are getting money for an All Savers Certificate by taking it out of passbook accounts, which now pay no more than 5.5% interest; that actually increases the cost of borrowing money for the financial institution. Concludes Stuart Root, president of the Bowery Savings Bank of New York City, third largest in the nation: "All Savers are not a panacea for our industry, but then again, nobody really thought they would be. The certificates were seen as a Band-Aid when no other medicine was around."

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