Tax law has lenders hopping forth with repurchase, All-Savers package

The flashy full-page newspaper ads didn't even wait for President Reagan to sign the tax-cut bill. A Boston bank announced "an investment breakthrough" with 18 percent interest. A New York bank threw in a cash bonus to yield an astonishing 25.76 percent. A Los Angeles bank dubbed it "Tax Free Savings."

The hubbub and hype are, of course, designed to attract consumers who have available cash. Banks and thrift institutions hope at last they have an investment instrument that will keep loyal customers on home turf and even lure back money-fund investors who cut out of passbook savings accounts long ago.

Here's how the "investment breakthrough" works: It's actually two distinct investments fused into one, explains Peter Blampied, a Boston Five Cent Savings Bank vice-president. From now until Oct. 1, your money goes to buy a retail repurchase agreement, also called a "repo." At current rates that will bring you more than 18 percent interest.

That's the high-interest bait to reel you in.

Then, when the new tax law takes effect Oct. 1, the bank or S&L will funnel your money automatically into a new All-Savers Certificate. It delivers a lower interest rate than the repo, but is tax-free on the first $1,000 interest. That makes an All-Savers Certificate especially attractive to the well-to-do, who are taxed at premium rates on their return from regular money-market funds.

The minimum investment ranges from $500 to $5,000.

One note of caution: Once you agree to the setup, Mr. Blampied says, you're locked into the certificate for a year. Congress has only approved the All-Savers Certificate on a one-year experimental basis.

It is the centerpiece of a congressional plan to bail out floundering thrifts , battered by the exodus of savers to the money-market funds. The thrift institutions are still bound by regulations governing the interest rates they may offer savers. The new law, however, will let them offer savings certificates yielding 70 percent of the interest rate on a one-year Treasury bill. The lure is the tax exemption on the first $1,000 earned in interest. It is hoped the thrifts will draw in more money for lending as home mortgages.

But some investors, especially those who don't want to lock up their money for an entire year, may want to consider forgoing the All-Savers Certificate and buying just a retail repo, some financial experts suggest. Retail repos have become increasingly popular since May, when federal agencies came out with guidelines that made them easier to get.

The new rules let a whole new class of player -- the small investor -- play the same repo game that the big money has played for a long time.

This is how a repo works: A bank or thrift sells a security, usually a government security, to an investor, with the agreement to repurchase the security at the same price on an agreed future date, plus interest. This serves to lock in the interest rate. It used to be minimum $100,000 investment. Now the minimum goes as low as $2,500 and possibly lower. Money is tied up for a minimum of one day, a maximum of 89 days.

Here's an example of how a retail repo is used. The owner of a small business in Portland, Ore., pays all the firm's bills by the tenth of the month. As soon as the last check is written, all income expect for a cash reserve goes to buy a repo until it comes time to pay the next month's bills.He can get to the money if he needs to, but in the meantime, the money that would otherwise be sitting nearly idle in a checking or savings account is put to work earning the firm much higher interest.

Like money-market fund investments, repos are not insured by the Federal Deposit Insurance Corporation. But since US government securities are considered a safe bet for investors, the only real risk lies in choosing where you buy a repo. The recent increase in the number of troubled savings- and-loan institutions makes it wise for a would-be repo buyer to scrutinize the institution that's selling them. Should an S&L go under, your money could be tied up like that of other creditors until the mess was cleaned up.

Banks and thrifts have played it cool on the repos alone, but hot on the repo as a way to slide customers into the All- Savers Certificate. Repos may be terrific for the customer, but not so great for the savings institutions. The newspaper ads that ran on the West Coast a couple of months ago touting the new, easier-to-get repos are rare now. As Mr. Blampied says, repos are "too labor-intensive." In other words, they cost the banks and S&Ls too much time and paper work.

So the savings institutions try hard to shift the spotlight elsewhere, namely , the All-Savers Certificates.

Critics of the All-Savers plan estimate the federal government will lose more than $5 billion in tax revenue through 1984.

The marketing plan of one Pacific Northwest bank originally called repos "the ultimate in cash management for small investors." But now Stewart Foster, an executive vice- president for that bank, the Interstate Bank of Oregon, calls retail repos "a temporary tempest in a teapot."

"It's a legal way to pay market [interest] rates without impinging on Regulation Q," he says, referring to government regulations that have restrained savings institutions from joining the interest rate brawl. Mr. Foster candidly admits that the repos are only a lure to bring in or keep sophisti" cated customers, who will then be loyal to the bank when deregulation comes.

John Kemp, vice-president of the United States National Bank in Portland, Ore., says one reason his bank isn't terribly eager to sell repos is that, in effect, it takes local money away: The Money goes indirectly to the federal government.

In any case, now the savings institutions have two weapons -- repos and All-Savers Certificates -- to fight for their survival until deregulation comes later in the decade.