Bankers sound like pretzel vendors, and there's a twist

The Lincoln Savings Bank advertisement in the New York Times shows a chubby, smiling vacationer, one hand held high stuffed with $100 bills, a couple of them floating away, the other hand grasping a money bag labeled "$2,000 tax free." The bold and big headline reads, "25 percent . . . up to $500 cash bonus and $2, 00 tax-free interest!"

Somehow that ad and other aggressive ads from various banks of savings-and-loan institutions come as a surprise. Most consumers are used to the splashy ads of retail discount houses, financial doomsday books, and so on. But somehow your eyebrows bounce a little when supposedly pin-striped, conservative bankers start sounding like carnival hawkers.

"Get 20 percent interest 'up front,' in cash,m at Emigrant now . . . and up to York's Emigrant Savings Bank in another full-page ad. Provident Savings Bank in Boston concludes a full-page ad with "You're too smart to be dumb about money."

Let's hope so. But consumers are usually wise to be especially careful when advertisement use what the trade sometimes terms "hype" or "puffery."

The ads are not inaccurate.Some provide considerable information about this new combination of so-called "repurchase agreements" and All-Savers Certificates." They just don't tell the whole story.

Here are some of the pros and cons of this type of investment:

The repurchase agreements, or "repos," are what might be called "loss leaders" in the retail business. They are intended to draw the consumer into the All-Savers Certificate, where his or her money will be tied up at a lower rate for a year. The repos offer those high interest rates highlighted in the ads. But that interest rate lasts only until Oct. 1, when the certificates become legal under the law passed this summer and your money will be switched into one. Thus the high interest is short-term; and the money is not insured by the government for those several weeks, though it is secured by US government or government-agency securities. Further, those rates are annualized -- your money wonht actually grow a full 25 percent, or whatever, in those several weeks.

The detailed rules for the certificates have not yet been issued. The maximum rate the banks and thrifts will be able to offer, however, will be 70 percent of the most recent 52-week Treasury-bill auction rate as of Oct. 1. So there hangs a major uncertainty. No one can predict precisely the rate at that time.

If interest rates remain high until then, you would tie up that high tax-free rate for a year. If interest rates drop dramatically before then, your money is tied up at that lower rate. Presumably, the investor might then have been better off investing now directly in a municipal bond or indirectly through a municipal bond fund that tied up today's high tax-free yield for longer. So the investor has to guess the direction of interest rates.

These certificates will be protected by government insurance.

A second problem is that the tax-free certificates are advantageous only to those in the 30 percent-or-more tax bracket. One ad notes that a couple with taxable income of $29,901 to $35,200 are already paying a maximum of 37 percent. But it might be noted that this is "taxable income" -- after all deductions.

Anyone in a tax bracket below 30 percent would be better off forgetting the tax-free angle and going for high-yielding taxable investments. If you expect interest rates to remain high, such an investment could be Treasury bills directly or indirectly through a money-market fund, or other high-yielding short-term investments. If you figure that interest rates are coming down, then you might want to consider bonds or mutual funds that invest in bonds.

Third, any interest earned above $1,000 for single tax-payers or $2,000 for those filing joint returns remains taxable. If the interest rate offered Oct. 1 had dropped to 10 percent, then the single taxpayer shouldn't be investing more than $10,000 and the couple, $20,000.

David Silver, president of the Investment Company Institute, charges that all All-Savers Certificates will create "a huge windfall to banks and savings-and-loan associations at the expense of 30 billion Americans who own stocks, bonds, and mutual funds." He's annoyed at the withdrawal of the current dividend exclusion by Congress when it permitted the All-Savers Certificates.

William E. Donoghue, publisher of the Money Fund Report, a fund newsletter, Money Fund Report, calls the All-Savers bill the "all-losers bill." He says the only winners would be those investing in municipal bonds, because municipal governments will have to pay higher yields to compete with the All-Savers Certificates.

The Investment Company Institute represents mutual funds, however, and Mr. Donoghue has become something of a spokesman for money-market funds.

From the consumer's standpoint, the All-Savers Certificates will clearly be an improvement on much lower passbook interest rates. They can be obtained relatively easily from local bank or thrift branches. But there may be better ways tto invest your money, depending on your individual circumstances, income level, your guess as to interest-rate trends, and other factors. It would be wise to know the facts before signing the check.