How a brokerage teams up with banks to offer certificates of deposit
For many United States banks, the search for new sources of money means doing battle with the powerful and growing securities industry. While brokerages can offer savers money-market mutual funds and asset-management accounts, the banks are trying to offer products that are similar to those from the securities industry - and as profitable.
In a few cases, however, brokerage firms and banks are discovering products that can help each side and keep both independent.
One such product comes from Butcher & Singer Inc., a Philadelphia-based brokerage. For several months now, Gary Peters, who works in the company's Hallandale, Fla., office, has been buying large blocks (over $1 million) of 2 1/ 2-to-10-year certificates of deposit from 10 or so banks around the country.
These days, Mr. Peters says, banks are much more aware of the need to compete and, where possible, cooperate with the brokerage community if they are to keep customers. So they have begun paying more attention to the fact that they can offer negotiated interest rates on certificates of deposit over $100,000. This means that an individual or company buying large blocks of CDs can get a substantially higher rate than a regular retail customer walking off the street could obtain with a smaller order. In his case, Mr. Peters notes, he can usually get a rate that is a percentage point or two above the advertised rate.
He then makes these CDs available to other brokerages - as well as other Butcher & Singer offices - in $5,000 to $15,000 packages for sale to retail customers. Thus, for a $5,000 minimum deposit, the brokerage customer gets a guaranteed rate on an investment that is insured by the federal government (up to $100,000), since the originator of the CD is a federally insured bank. Additional purchases can be made for as little as $1,000.
While interest rates are slightly higher than for ordinary CDs, the actual rate on a 21/2-year CD, for example, depends on how frequently a customer receives interest payments. Currently, someone receiving annual payments, or reinvesting the interest, gets 10.55 percent, Mr. Peters says; for semi-annual payments, the rate is 10.25 percent; for monthly payments, it is 10.05 percent.
Unlike ordinary bank CDs, on which a customer can lose up to six months' interest as a penalty for early withdrawal, there is a ''secondary market'' for people who buy through a broker and want to get out early.
''A good secondary market is developing for these CDs,'' Mr. Peters asserts. So if a person bought a 12 percent CD several months ago but discovers he needs the money now, he can sell it to someone else at no cost, through his broker, letting the new owner receive the 12 percent-based interest payments.
The positive response he has gotten on these CDs, says Mr. Peters, who is a senior vice-president at Butcher & Singer, shows that many customers still want government insurance on their savings and are wiling to give up some yield and liquidity to get it.
''We know who our customer is,'' he says. ''He's not a municipal bond buyer. He's not a commodity buyer. He's a saver. He wants the safest investment he can get, with no risk.
''We're aiming at the retired person who used to put all his money in a passbook.''
By selling these CDs, Mr. Peters acknowledges, he is helping bend the lines between the banking and securities industries. Since the passage of the Glass-Steagall Act in 1933, one of those lines has been that brokers could not take deposits. ''Now, brokers can sell deposits for the first time,'' Mr. Peters notes.
I recently saw a reference to an ''RFC mortgage.'' Do you have any information on this mortgage?
There are two RFCs. The first was the Reconstruction Finance Corporation, set up in the Great Depression to help homeowners arrange easier financing for their houses. Without it, many people who were unemployed probably would have lost their homes. It is no longer in existence.
The current RFC is no relation. Here, the initials stand for Residential Funding Corporation, a subsidiary of Banco Mortgage Company, a Minneapolis mortgage company. It is underwritten by MGIC Investment Corporation. The purpose of this RFC, a spokeswoman says, is to provide lenders with a secondary mortgage market for home loans between $108,300 - the limits for federally chartered housing finance agencies - and $500,000. Thus, if a lender does not want the burden of a large mortgage on its books - $200,000, for instance - it can make the loan anyway, then ''sell'' it to the RFC, even though the original lender continues to service the loan and take payments on it. The RFC also devises flexible mortgage packages. Thus, the RFC does many of the same things as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, but for higher-priced homes.
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