The Prime Is Anything but Prime

Many people these days keep an eye on the prime rate the way a baseball fan watches the major league standings. The prime rate, usually defined as the lowest interest rate that banks charge their most creditworthy customers, is no longer just an arcane financial statistic. It has become a subject for TV news commentators and cocktail-party conversations.

Few people actually borrow at prime. Loans to small, well-financed businesses, for instance, usually run from half a percentage point to three points above prime. Consumers who borrow to finance a vacation or pay taxes may pay three to five points more. Loans like those made to new-car buyers can be well above prime. On the other hand, interest on home mortgages, which now averages 16%, trails behind because such loans are issued for 20 to 30 years.

Nonetheless the prime rate remains the bench mark by which most people measure the cost of credit. But a new report by the House Banking, Finance and Urban Affairs Committee suggests that the once sacrosanct prime has become almost meaningless as a guide to what most borrowers--big or little --actually pay. The report, which mainly addresses the prime rate's application to business borrowing, found that it rarely applies to large, profitable corporations. They can usually borrow money at three to four points below prime, a discount reflecting the importance of the volume of their business with their banks.

The committee found that during May 1980 more than 60% of the commercial loans granted by large New York banks were made at rates below the prime, then 17%. The average rate charged: less than 13%. Chairman Fernand J. St Germain maintains that the posted prime rate has now become an excuse for banks to jack up interest rates.

Even before the St Germain report, small businessmen across the U.S. were skeptical that the prime was really the best rate available. Snaps Robert Laughlin, a Portland, Ore., food-equipment distributor: "The prostituted prime is nothing but greediness on the part of large banks." Attorney Jackie Kleiner has filed suit against the First National Bank of Atlanta, alleging that it uses an artificial prime to discriminate among borrowers. Says Kleiner: "The prime rate is supposed to be the bank's cost of obtaining money, plus a small profit. But it turns out that the profits are obscene."

Some banks are now seeking to redefine the prime. New York's Morgan Guaranty Trust has issued a definition that sounds as if it were drafted by committee: "The bank's prime rate shall mean the rate of interest publicly announced by the bank in New York from time to time as its prime rate." Translation: the prime is whatever we say it is.

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