Government Services Savings of Bethesda unveiled a new account this week that the S&L declares is "bad news for the money market funds."
However, it's unlikely that Government Services' new Insured Money Fund Account by itself will create a major problem for the money market mutual funds doing business in the area.
On the other hand, Government Services is convinced that its new account will attract enough investors to siphon off some badly needed funds that have flowed to the popular high-yield money market funds.
A.R.M. Boyle, Government Services' president, estimated that balances in money market mutual funds in this area exceed $5 billion. That illustrates how much business has been lost by traditional deposit institutions, he added.
Saddled with persistently high interest rates and low-yield mortgages, the savings and loan industry is trapped in its worst financial crisis since World War II. And the industry maintains that the situation is made worse by competition from money market mutual funds, which operate under fewer constraints.
Faced with continuing losses, officials of a good many S&Ls that have managed to survive are searching for measures to blot out the red ink.
"Obviously they all are attempting to upgrade the yield on their assets," remarked Charles C. Hogg, executive vice president of the Maryland Savings-Share Insurance Corp. (MSSIC).
MSSIC is a state-chartered deposit guaranty association for Maryland S&Ls. Like its federal counterpart, the Federal Savings and Loan Insurance Corp., it insures each deposit account up to $100,000.
State-chartered S&Ls operate under fewer regulatory restraints than their federally insured counterparts and have taken the lead in implementing innovative programs to improve their asset base.
For example, two Virginia S&Ls recently announced that they would sell or swap some of their assets in exchange for badly needed capital.
Last year, Community Savings and Loan, a $60 million association in Gaithersburg, became the nation's first S&L to offer an account that eventually served as the model for Government Services' new account.
Community increased its deposit base almost 50 percent in only one year as a result. Although some Baltimore S&Ls have followed Community's lead, only one in metropolitan Washington thought it was worth the risk before Government Services decided to take the plunge.
Federal regulators have considered a similar account but several issues are yet to be resolved.
The big difference between Community's account and Government Services is packaging, says Boyle. What's more, unlike smaller S&Ls, Government Services has "the muscle to put it across," he contends.
Boyle calls the decision a "bold stroke," but some observers see it as a big gamble for the S&L, which has suffered heavy losses recently. Results reported in September for fiscal 1981 showed it made a substantial pretax profit from the sale of property in Bethesda.
But there was no material improvement in results reported last December and, "Like every savings and loan in this area, we're losing money," Boyle acknowledged.
But Boyle is confident that the new account, which will have an administered rate competitive with those offered by the money market funds, will make a difference. For the week ending May 15, Government Services quoted a seven-day average rate of 14 percent and an effective annual yield of 14.93 percent. The seven-day average yield on money market funds for the period ended May 13 was 13.8 percent.
Government Services is counting heavily on the fact that investments in its fund are insured up to $100,000 for each account. Critics of the money market mutual funds have always argued that investors aren't insured against a fund's collapse.
Although deposits in the new accounts are backed by the MSSIC, the full faith and credit of the State of Maryland is not pledged. But according to Hogg, a flood of funds into that type of account wouldn't increase the MSSIC's exposure because they would be invested in highly liquid instruments, and the account is highly marketable.
It's a safe bet that Government Services will hit hard on the insurance aspect. "We think what we intend putting in our advertising campaign will make it clear people in this area have an alternative," said Boyle.
The new account, which requires a minimum investment of $3,000, also allows for up to three withdrawals a month and check-writing privileges.
But Government Services runs the risk of having depositors transfer a substantial portion of funds from lower-yield passbook accounts to the more attractive money fund account, thus increasing the S&L's liabilities.
However, Government Services apparently has calculated its minimum balance to offset that. And Boyle says that the account has been planned so that "we think it will help us grow out of the negative spread we're in."