Cashing In On Cds

Federally insured jumbo certificates of deposit have always been good investments -- they are safe, and they yield higher-than-average rates of interest. And how, with CDx, your fingers can do the depositing.

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Most of the money that Field Container Corp. of Elk Grove Village, Ill., takes in each year comes from manufacturing folding paperboard cartons for Sara Lee frozen baked goods, the AC Spark Plug division of General Motors, and others. Some of the rest is brought in by investing the company's idle cash, particularly in "jumbo," or $100,000 certificates, of deposit. These CDs are issued by banks and savings and loan associations and, on average, yield three-quarters to one-and-a-half percentage points more in annualized interest than other short-term, federally insured or guaranteed investments.

This high rate of interest is reason enough for a company to put its money in jumbo certificates, but Field Container has another motive. Vincent J. Hotton, corporate controller, wants safety, and, with jumbo CDs, that is what he gets. How? Jumbo certificates, like all CDs, qualify for protection by either the Federal Deposit Insurance Corp. (FDIC) or the Federal Savings and Loan Deposit Insurance Corp. (FSLIC).

But there is a catch. The insurance is limited to $100,000 per depositor per institution. That is a drawback, but not an insurmountable one. To beat the system, the investor simply purchases no more than one jumbo certificate from any institution. That is what Field Container does, although, in the past year or so, the way the company goes about buying the CDs has changed. When Field Container first started buying certificates, Hotton would periodically spend a day or two on the phone, asking 30 to 40 banks and S&Ls how much they were paying on jumbo CDs. He would then place orders with the 20 or so that offered the highest interest rates.

The strategy worked -- Field Container's money was always fully insured -- but keeping track of it all was an administrative nightmare. Then CDx (certificate of deposit exchange) came along. A service of Harvey Baskin & Co., a Washington, D.C., financial services firm, CDx is a new, computerized exchange for 30to 360-day, fcderally insured certificates of deposit. To rise the system, a company merely calls tbe CDx rrading room by dialing a toll-free number and places an order to purchase as many jumbo certificates as it wants (the minimum is $100,000). A record of a company's prior purchases is stored in the CDx computer. Using this information, the computer eliminates those institutions where a company already has deposits, then buys no more than one $100,000 certificate from any of the remaining banks and S&Ls. It also selects for the customer those institutions that pay the highest interest rates.

The "executed orders," as CDx calls them, are transmitted by computer to the New York office of Boston-based State Street Bank & Trust Co., the issuing agent for all the certificates sold through CDx. State Street delivers the certificates against receipt of payment to a lower-Manhattan bank designated by the purchaser to act as custodian.

For the customer, the whole transaction takes less than five minutes, which explains why Field Container and other small businesses have been quick to sign on. They like the convenience of shopping for certificates by making a single telephone call. They also like the fact that, for them, the service is free. The bank -- not the customer -- pays CDx a fee when a certificate is sold.

That fee, reports Karen Fawcett, a Harvey Baskin vice-president, "is 36 basis points annualized," meaning thut financial institutions pay $1 a day for each $100,000 certificate sold. Obviously, they don't mind. Since it was inaugurated in September 1982, CDx has wired more than $1 billion to the 500 or so banks and S&Ls that issue CDs through the system. "And," Fawcett notes, "it keeps growing every day." Among CDx's customers are companies with idle or surplus cash, credit unions, and pension funds.

One reason for CDx's success is that many businesses are concerned about bank failures and, as a result, want to make sure their money is insured. Field Container is typical. "The banks," Hotton says, "especially the big banks, are heavily invested in Third World countries. We just think spreading our money out [to different institutions] is a much safer way to go."

Another reason for CDx's growth is its acceptance by small community banks -- institutions with deposits of less than $150 million. These banks and S&Ls need new dollars, and CDx provides them with a means to capture such funds. As Richard W. Payne, vice-presient of investments for the Investors Savings and Loan Association in Richmond, Va., and Bruce A. Baky, vice-president and funds manager for Westlands Bank in Santa Ana, Calif., point out, CDx is an efficient and cost-effective way of attracting deposits, especially when the demand for loans is high. "If we have a timing problem between our deposits and our funding needs, we use CDx," comments Payne.

In general, the banks and S&Ls issuing CDs through the CDx system have deposits of $65 million to $70 million each. "The Chases and the Chemical Banks don't need us to attract funds for them," says Fawcett. "They can call Salomon Bros. and raise $25 million or $25 billion in five-and-a-half seconds. It's the smaller banks and S&Ls that we serve."

As it turns out, there are plenty of these smaller banks and S&Ls. The American Bankers Association, a trade group in Washington, D.C., estimates that 12,000 of the country's 14,500 commercial banks are community banks. Similarly, 2,900 of the nation's 3,800 S&Ls have deposits of less than $150 million, according to the United States League of Savings Institutions, a Chicago-based trade association.

Baskin, of course, is not the only company offering certificates. Such major brokerage houses as Merrill Lynch do it, too, but Baskin's CDx is different. CDx, explains Fawcett, offers "one-wire transfer, same-day settlement, instant execution, and an automated delivery system." In short, it is a true exchange.

Another difference between CDx and other certificate brokers is that it does not negotiate rates. Each day, the banks and S&Ls that are enrolled as members of CDx choose whether to list the availability of CDs from their institutions. At the same time, they set the rates of interest they will pay. And that is it. There is no haggling between the buyer and the seller. "We're putting buyer and seller together through a computer network," explains Fawcett. "Sure, you can buy CDs through [other brokers], but they will negotiate rates."

To most small and medium-size companies, negotiated rates are not that important. For one thing, to negotiate higher-than-market rates, you generally must be willing to deposit more than $100,000 in a single institution, and many small and medium-size companies don't want to do that. They want the protection of federal insurance -- and who can blame them?