Up or down, a change in the prime lending rate is sure to warrant a prominent headline in this newspaper and most others.
Those who discussed their gardens at cocktail parties a decade ago now cluck about the prime rate. Cab drivers, barbers and bartenders talk as readily about the prime rate as they do about the weather. The Dow Jones average can rise or fall a dozen points on the day a major bank announces a change in its prime rate.
Some government agencies key their lending charges to the prime rate. Small businesses often find their interest rates keyed to the prime rate.
What is this creature?
That's the seemingly simplistic query that the chairman of the House Banking Committee posed to the nation's 10 biggest banks recently.
What Rep. Fernand St. Germain (D-R.I.) discovered is that the prime lending rate -- which a healthy portion of the population cites as the key to everything from mortgage availability to the survival of Chrysler -- means very little to the large corporations to which it is supposed to apply.
The prime rate is hardly prime. Muscular companies can -- and do -- negotiate short-term loans at rates substantially below the prime rate substantially below the prime rate, while less-formidable borrowers are charged rates tied to the prime.
As aphorisms go, the prime rate is a recent addition to the language. It was introduced, by bankers, in 1933. The New Collegiate Dictionary defines the prime (only the uninitiated, such as Webster's, need attach "rate" to the term) as the interest cost "at which preferred customers can borrow from banks and which is the lowest commercial interest rate available at a particular time." In banking parlance, "preferred customers" are the biggest and most creditworthy major corporations.
In other words, the prime rate should be the lowest rate at which a bank makes loans, at least for periods of up to a year.
Yet St. German, the Federal Reserve Board and those banks which chose to help out demonstrated that the prime is often far from the lowest rate major companies need pay to get money.
That is perhaps as it should be. Since 1933, the world has changed. Big companies can shun their banks and borrow directly in the open market at lower interest rates. No bank should be expected to turn down a General Electric loan that promises to make money (and be paid back) merely because GE can find money elsewhere, and more cheaply.
In a fast-changing world, one cannot hang on dictionary definitions.
The banks should have responded that "the prime rate is what we want to get, and what we thing we should get, from our best customers based on what we have to pay for funds. But we can't always get what we want to charge. And we're not in the business of losing customers, especially good ones, when we can avoid it."
But the banks, in response to St. Germain's questions, often provided gobbledygook. Here's what Morgan Guaranty Trust Co. has to say:
"The bank's prime rate shall mean the rate of interest publicly announced by the bank in New York City from time to time as its prime rate."
Continental Illinois, the big Chicago bank, seemed to be the most forthcoming. It chairman, Roger B. Anderson, said his bank has any number of "prime rates," depending upon the loan. Brokers, who borrow money overnight, will pay a rate that is higher or lower than the prime rate (presumably depending upon how much it costs Continental to buy funds for 24 hours). Big companies that need money for a few days probably will pay a different rate than those that want it for six months.
In other words, companies with different needs of clout will pay differently. Is that discriminatory or a violation of antitrust laws? Probably not.
Although antitrust laws prohibit pricing that is in restraint of trade, they do not require businesses to go out of business in order to offer the same price to all comers.
But St Germain is correct in pointing out that the prime has come to mean the lowest rate at which a business can obtain a loan from a bank. It is not. In many cases, as some studies by the Federal Reserve Board and the banks replying to St Germain's questionnaire show, the prime rate can be substantially higher than the lowest rate a bank offers.
Yet, as George Baker, Continental Illinois' top lending officer, points out, a major chunk of the bank's loans to major corporations are made at the prime rate. Many of the below-prime loans are made for a day or a week and tend to seem more important than they are because of heavy turnover.
Even so, the prime rate is less important today to the big corporate however than it was in 1933. And banks, despite their disclaimers, tout changes in the prime -- on average, it changed about 40 times last year.
The prime rate is a useful indicator of the diretion of interest rates in general. Banks, like all other purveyors of goods and services, do not want to charge any more than they have to.
At the same time, their most captive customers are the businesses that sign loan contracts tied to the prime rate.
The banks claim the public exaggerates the important of the prime rate. General Motors probably would agree. Perhaps those small companies who pay rates keyed to the prime would not find fault with the rates they pay.
Yet Chairman St Germain is correct when he tweaks the banks. The prime rate (or "base" rate, as some choose to call it) means less than it did a decade ago.
And those who believe, their lives depend upon it have the right to know what the banks really charge their best customers.