Removing The FDIC's TLGP Crutches Results In A Major Funding Cost Divergence

Tyler Durden's picture

Rewind to March of this year when not even Goldman Sachs could issue non-FDIC guaranteed debt, (thank you TLGP). Of course, now that the Fed has made its one purpose in life to print enough money to irreparably clog every traditional risk measure, the TLGP program is presumably no longer needed (although a few banks did catch the last possible TLGP issuance window just at the program was being wound down). One question that deserves an answer is when will the banks that have borrowed cheap TLGP funds repay these? After all, the banking system is now "perfectly solvent," so it should be a formality for them to return all the money that is being guaranteed by taxpayers. This is especially true at Goldman, which is about to pay over $20 billion in bonuses, yet still has almost $30 billion in TLGP funding on its books: that's more than enough to cover each bonus dollar. Maybe Goldman can truly do god's work on earth and instead of paying bonuses simply repay taxpayers by retiring the firm's TLGP borrowings? Of course, we can dream.

What is more curious is the rather dramatic dichotomy that has emerged as a result of the TLGP program's expiration, and subsequent fund raising efforts. While some banks, namely those that have a depositor base, have demonstrated an ability to raise capital at spreads comparable, if not tighter to TLGP spreads, others have not been so lucky. We present the US Bancorp - Morgan Stanley case study.

As the example below demonstrates, both USB and MS issued TLGP debt on March 10 with the same coupon, at almost the same spread (87 bps for a $2 billion issue for MS, 81 bps for a $750 million issue for USB). Yet a few days ago, both banks, once again concurrently, raised a non-guaranteed senior issue: what is notable is that while USB managed to complete this round at a spread even tighter to its TLGP issue, Morgan Stanley gave up 120 bps in the process: USB's new $500 million issue came out at 80 bps, while Morgan Stanley had to go all the way to 205 bps to find buyers!

The incremental cost for Morgan Stanley: $24 million a year. This is almost enough to pay the bonus of a Goldman bond trader. Of course, added up this spread differential could end up amounting to quite a material number. The question at hand is who does the market now see as a first and as a second tier financial firm: Morgan Stanley, which does not have a depositor base despite it BHC moniker, seems to suffer as a result of it having become a poor man's Goldman Sachs. This will likely impair it and its peers for the future, as deposit-based banks continue procuring beneficial market terms.

Moody's had the following to say on this divergence:

Although this is just one example, to the extent such funding cost differences persist over time, lower-rated U.S. financial institutions will be at a competitive disadvantage that may be material. The disadvantage would reinforce rating distinctions among firms, all else being equal. We also note that, for many smaller firms, market access is still not what it had been prior to the current financial crisis. The competitive disadvantage for those institutions might be even greater.

And, it goes without saying, that cheap credit will only continue up to such a point that the Fed decides it is time to commence tightening the trillions in excess liquidity. Then again, the probability of that happening in our lifetimes is very, very slim, as the Fed is fully aware that should this final bubble pop, there will be no coming back.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Anonymous's picture

The FDIC Is Broke: Yes, really. Off the wire this morning: 'FDIC Deposit fund had negative $8.2B balance in Q3'. That's broke. Bankrupt. Kaput. Gone. Poof. Dead. Rotting. A corpse.

jongreen's picture

I'm weary of the phrase "pay the taxpayer back". I understand the principle, but c'mon, taxpayers have never been paid back.

AnonymousMonetarist's picture


Tyler, I will bet you one rentenmark that by this time next year we'll break a trillion on the 'Permanent' Liquidity Guarantee Program. AM Pixie Dust , 11/25/08 :

It was always the same conversation. Create a synthetic that follows the yield curve but gives you some juice over treasuries. Create some sort of RAV (remote asset vehicle) and then get that AAA pixie dust sprinkled on top of it . Usually the person describing it was a current or past associate of a Master of the Universe.

Yield pigs would line up at the trough if it was as safe as treasuries but had some juice, they proclaimed.

Different than all the known exotics that we've heard of - they spoke about this new 'straw into gold' synthetic.

This synthetic could be applied to anything- hence the RAV- much like Palin's turkey chopper, a construct that would suck in any sizable asset and spit out the synthetic.

Having a Heston moment as I read the WSJ describe how the dirty apes:

'In effect are issuing(Goldman) synthetic Treasury bonds, at a much higher yield than straight Treasury bonds."

The article goes on to say: "Responding to banks' urging, the Treasury department agreed to guarantee the bonds, backing the "full faith and credit" of the U.S. government." "Citigroup, General Electric (as well as JP Morgan and Morgan Stanley named elsewhere) and other companies have signed up to sell bonds under the plan."

You had to go and do it didn't you? You had to go and blow it all up...

Calling All Meatballs, 11/26/08 :

Our new monetary industrial policy i.e., synthetic Treausries where the RAV is the issuing company, is fraught with peril. Building a federally mandated sausage factory for the Masters of the Universe will end up making sovereign and private risk ubiquitous and to the detriment of the sovereign.

We are all derivatives now, 11/29/08 :

The Masters of the Universe turned themselves into the RAV, got the AAA pixie dust and put themselves to market. It is not too often where, we the people, get to witness and insure the birth of a new asset class.I'm glad that it is only a liquidity problem and not a solvency problem ... 

Goldie and the girls just got the keys to the safety deposit box.

Third a trillion meatballs so far, 8/11/09 ;

The Temporary Liquidity Guarantee Program has spewed out about a third of a trillion of these 'industrial' treasuries and maintained that level for the last four months.

Although originally envisioned as short-term - as of June 30, 2009 terms at issuance of over 2 but less than 3 years totaled 23.6%, and terms over 3 years totaled 38.4%. 

I expect we'll break the cap, which is twice this level, and extend it several times.

Today's WSJ :


Congress should be doing all it can to remove moral hazard from the financial system. Instead, it is in danger of increasing it.

Following the credit crunch, lawmakers need to ensure banks can't borrow at below-market rates because of perceived government backing. After all, banks' access to cheap funding helped inflate the credit bubble.

Instead, Congress is heading in the opposite direction. Legislation being considered already contained features that could end up being used to provide taxpayer backing to bank creditors. But Wednesday the House Financial Services Committee went even further by approving a measure that would allow banks to issue government-backed debt in difficult periods.

It could effectively enshrine a recently expired program that helped banks sell more than $600 billion of subsidized debt during the crisis.

(Nancy Capitalists in a Sovereign Democracy that are hell bent to seek rent. -AM

Granted, this temporary measure helped prevent a liquidity crisis.

(Liquidity crisis? Hit me! -AM)

But making it permanent could dissuade banks from ensuring their balance sheets are more resistant to funding pressures, and bank creditors from doing proper analysis.

(Going, going gone. -AM)

Proponents of the measure say there are plenty of other things in the legislation aimed at reducing risk in the banking sector, like tougher capital requirements. But those things don't need debt guarantees to work. If Washington wants bank creditors to do their homework, it needs to leave some uncertainty in the system.

(Damn dirty apes. Its' a madhouse! -AM)


AnonymousMonetarist's picture

The WSJ article referenced was on November 19th.

At no time will their hands leave their arms.

Rollerball's picture

Love the allegory.  Perfect fit.

tom a taxpayer's picture

Thank you, AnonymousMonetarist, for the latest crime report. The Wall Street gang of master thieves remains at large...committing one outrageous scam after another. Worse, the Treasury men that are supposed to protect the public and taxpayers are continuing to aid and abet Wall Street's latest frauds, money laundering, and looting of the U.S. Treasury.

lizzy36's picture

Question 1: GE capital was the biggest user of this program (to the tune of $90B), what is the incremental cost to GE going to be (no idea if JPM's comfortably numb redux touched on this)?

Question 2: who holds the most TLGP-guaranteed debt?


deadhead's picture


1. love the jpm comfortably numb!! 

2. i have searched the FDIC site to try to find a list and cannot find one.  it could be due to my shortcomings but it has not been for the lack of effort.

SDRII's picture

TGLP has a 0 risk weighting as far as bank capital so one suspects the banks own a ton of it

lizzy36's picture

thanks for reply. 

that risk weighting changed to 0% a/o end of Sept 2009.  prior to that is was 20%. hence my initial question..


deadhead's picture

for those that have children......don't you just get sick of telling or asking them the same thing over and over and over and over???

that's just how I feel about Lloyd Blankfein and Goldman Sachs on this FDIC TLGP matter. so, once again:

Lloyd: you stated in your recent WSJ interview that you "wished" that Goldman had borrowed zero under this program.  What the phuck man, you've got the money now and instead of handing it out as bonus compensation, pay us taxpayers back NOW and go out and borrow in the cap markets on your own without American taxpayer backstopping and guarnatees!

You are a complete hypocrite on this matter Mr. Blankfein and this hypocricy is just one example of why your recent apology tour is not being well accepted at all.  Frankly, you are full of bullshit.

Rollerball's picture

I have two teenage pre-college girls.  They know they're already 40,000 pesos in the hole before their first paycheck (phucked).  Mr. Middle Class is likely to go out with a bang Rather, Dan (not) a whimp.

David449420's picture

Rather Eurocentric, don't you think?


Hondo's picture

I couldn't agree more.  Before bonuses every last taxpayer subsidy should be paid back.  In effect the taxpayers are helping pay those **** bonuses.

time123's picture

Yes, the FDIC needs additional funding. But are the banks strong enough to provide it, or will the US Treasury be tapped to do it? It will interesting to watch how it will be done.