Wells Fargo Banks on a CD That’s Good as Gold (Prices) : Accounts Linked to Commodities, Stocks Let Investors Play the Markets While Being Hedged Against Losses
By introducing a certificate of deposit with interest rates tied to gold prices, Wells Fargo last week became the first California bank and the second nationwide to offer a savings account linked to stocks or precious metals.
Such innovative accounts are a new attack by banks on the decades-old wall separating the banking and securities businesses, some observers say. And, because the accounts give investors the chance to earn higher returns than traditional savings accounts with limited risk, they could revive consumer interest in bank savings products, which have lost luster in recent years amid declining interest rates and the bull market in stocks.
That sales potential, industry officials say, will spur more institutions to offer the accounts, despite a pending legal challenge from the mutual fund industry and other regulatory uncertainties.
“It’s revolutionary,” said Robert K. Heady, publisher of Bank Rate Monitor, a North Palm Beach, Fla., newsletter that tracks savings products. “Expect to see other major institutions consider, if not copy, this approach.”
‘A Natural Evolution’
“This is the next step in the process of banks offering a broader range of investment options,” said Jack Kopec, Wells Fargo’s executive vice president for consumer services. “It’s a natural evolution of the deregulation of interest rates (on savings products).”
These new CDs, in effect, let investors play the markets, yet be hedged against losses. The interest rate earned on the CD is tied to an index, such as the London afternoon gold fix in the case of Wells Fargo, or Standard & Poor’s 500-stock index in the case of Chase Manhattan Bank of New York, which became the first bank to introduce such a product earlier this year.
The investor agrees either to pay a fee up front or accept lower interest rate or no interest at all. In exchange, depending on the product, the investor gets all or part of the gain on the index. If the index falls, the investor still gets back his initial investment.
Such products will appeal to investors who do not want to miss out in case the stock or commodities markets take off, yet also do not want to lose money, Heady said.
Cut the Risks
Wells Fargo and Chase cut the risk in such investments by buying options or using other sophisticated hedging techniques that protect investors from losses. The bank uses the up-front fee, or the interest that the investor forgoes, to buy the options and make a profit as well.
Other banks also tie savings account rates to indexes, but none until Chase or Wells Fargo has tied them to stock or commodity indexes. Columbia Savings of Denver, for example, ties a CD to the 91-day Treasury bill rate. Republic National Bank of New York offers money market accounts with interest based on daily averages of several bond-oriented mutual funds.
Under Wells Fargo’s six-month Gold Market Certificate, investors may deposit from $2,500 to $1 million and choose one of two options. Under the first option, they will receive 100% of the percentage gain in the price of gold in exchange for an upfront fee of 5.5% of the initial deposit. Under the second option, they will receive a 50% share of the gain for a 1.5% fee. If gold falls, the full initial investment is returned.
Fees are payable when the account is opened and will vary based on market conditions, Wells Fargo said. Like traditional CDs, the accounts are insured up to $100,000 by the Federal Deposit Insurance Corp.
Chase’s Market Index Investment gives investors a choice of several combinations of interest payments and gains on the S&P; 500 index. The simplest, and most popular, allows the investor to forgo all interest payments in exchange for 70% of the increase in the index. If the index declines, the investor receives no interest but still gets back his initial investment.
Some Consumers Confused
Such products do have some drawbacks, however. Some consumers may be confused about the CDs--and angry if the index declines and they end up earning no interest, said Edward E. Furash, president of a bank consulting firm in Washington that bears his name. He added that the products, because they are more complicated than ordinary CDs, could raise serious regulatory questions about whether the terms are adequately disclosed.
Also, consumers are not really better off, experts say, because the forgone interest and up-front fees, in effect, pay for the chance to earn higher profits on stocks or gold. In other words, there is no free lunch with these products.
Nonetheless, the products “are a clever marketing device” to get people to buy what, in effect, is a variable-rate CD that has properties of a mutual fund, Furash said. If it goes over well, it could reduce banks’ need to market mutual funds separately.
Happy With Demand
Chase Manhattan and Wells Fargo officials say they are happy with initial demand.
“The response has been excellent,” Chase Manhattan spokesman Kenneth Mills said. The new product has resulted in “our best response for a consumer product since the deregulated CD.”
Wells Fargo’s Kopec said the bank received “quite a few calls” Friday, the first day that advertisements for its new CD ran in various newspapers.
But the Investment Company Institute, a trade group representing the mutual fund industry, contends that Chase and Wells Fargo are illegally selling securities. It sued Chase and the Comptroller of the Currency, who regulates national banks, seeking to halt the New York bank’s offering on grounds that it violates the Glass-Steagall Act of 1933, which bars banks from selling securities.
“They are offering securities products and covering them with federal deposit insurance, which was clearly designed for banking products,” Investment Company Institute spokesman Erick Kanter said.
Legal Review
Chase and Wells Fargo, however, contended that the accounts are savings products, not securities. Spokespersons for both institutions said they are confident that their new CDs will hold up under legal review.
But the jury is still out. The Office of the Comptroller of the Currency threw a monkey wrench into the process last week in its response to the Investment Company Institute’s suit. The agency said it never approved the Chase CD and wants to review it for an eventual decision.
Stay tuned, a spokesman for the comptroller said.
