The Man Who Cut the Prime

John R. Bunting, president of Philadelphia's First Pennsylvania Banking & Trust Co., says that he wears "the longest hair and widest ties of any banker I know." That is only one reason why he often discomforts conventional colleagues, many of whom rank him second only to Wright Patman, the congressional curmudgeon, as the man they like to dislike. Bunting, a 45-year-old Presbyterian, has publicly castigated other bankers for discriminating against Jews, and has talked of adding youths under 25, consumer crusaders and even militant feminists to First Pennsylvania's board. He has also introduced "Earth Bonds" to finance environmental improvement projects.

Last week he shook up conservatives again by making his bank the first sizable one to cut the prime rate--the basic interest charge on loans to businesses with the best credit ratings--from 8% to 7 1/2. Jokingly, he said that he pared the prime partly because "our bank needs the publicity. We haven't been in the newspapers for quite a while."

Some other bankers grumbled that that was the only reason. They pointed out that interest rates on several forms of corporate borrowing are higher than 8%: interest on longterm, high-quality utility bonds, for example, averages 8.6%. Bankers also thought it illogical --and potentially harmful to bank earnings--that Bunting should reduce the rate at the outset of the heavy seasonal demand for loans to finance Christmas inventories. Said one prominent Manhattan banker: "I think that John is a kind of way-out guy."

Still, there is much logic behind a prime-rate reduction. If the General Motors strike is prolonged, business-loan demand is likely to soften. In addition, the Federal Reserve Board lately has been pumping more money into the banking system. From July 1 to Sept. 1, the money supply increased at an average annual rate of 8.3%. Some bankers suspect that Federal Reserve Chairman Arthur Burns is expanding the supply rapidly in hopes of bringing down interest rates to help out his fellow Republicans in the November elections. Key short-term interest rates already have fallen. The "federal funds" rate at which banks borrow excess reserves from each other has declined from 8% or 9% earlier this year to 5 7/8% in New York City.

At the same time, the profits of major banks in the New York and Chicago money centers have been rising. Bunting says, for example, that in July and August the earnings of First Pennsylvania ran 25% ahead of the preceding year. Meanwhile, the profits of many corporate customers, who must borrow at 8% or more, are falling.

Buoying Stocks. First Pennsylvania's prime cut sent cheer through the business community. The prospect of further relief from the high interest rates that have hurt borrowers for two years was a major reason why the stock market snapped back last week from an early sell-off started by the G.M. strike. California's Bank of America, the largest in the nation, is seriously considering following Bunting in lowering the prime rate to 7 1/2%, perhaps this week. Some Manhattan bankers would not be surprised to see the cut soon become widespread. Bunting predicts that the industry's giants will follow his lead, as they reluctantly did two years ago when First Pennsylvania made a reduction that competitors initially called "premature." He professes to be unconcerned, however, about whether competitors will follow him this time. "If they do not," he says, "we will get more business."

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