In a stark demonstration of how U.S. banks can potentially circumvent the FDIC's TLGP program and the agency's hopes of raising DIF reserves by charging new and higher fees, JP Morgan today successfully raised 2 billion euros in 5 year unsecured paper. The bonds priced at 375 over LIBOR. This was only the first debt issue for a U.S. bank outside of the TLGP program since the Lehman default in September, and a third for financial issuers, with the only other two examples being GS' 10 year bond pricing January 29 and a 30 year GECC bond pricing January 6, both due to term-paper demand. The JPM note, however, was not based on term demand as it only 1.25 years longer than the current overriding TLGP ultimate guarantee maturity of December 31, 2012.
As a reference point, JPM's 2.2% notes of June 2012 trade at LIBOR + 23.75. When one factors the 100 bps FDIC fee, the total cost to an issuer for identically comparable TLGP debt would come to 124 bps. The implication is that JPM is willing to pay 251 bps of additional interest to a) extend the maturity by less than 2 years and b) gradually shift away from having its new capital issues done under the TLGP, and thus the government's (with its populist constituency) umbrella.
As Zero Hedge had earlier speculated, the incremental costs associated with the TLGP program will make seeking alternative avenues to FDIC-backed issues much more attractive, especially in the eurodollar market. Furthermore, as next up on every bank's agenda is putting as much space between itself (as a private enterprise) and the government (just look at recent headlines disclosing the desire of banks such as GS and BAC to repay TARP as soon as possible), the refinancing of TLGP issues with unsecured paper will become the next prerogative, especially since the market seems to have forgotten that just a month ago the prevailing paradigm was that unsecured debt would see 25% haircuts.
This may have the unintended consequence of dramatically reducing the projected fees the FDIC had hoped to generate, as banks cease utilizing the TLGP for new capital raises. Ironically, by making the banking sector (seem) healthier, the administration has lost one of the major cash funding mechanisms for the replenishment of the Deposit Insurance Fund, putting the FDIC even more in bed with the Treasury, to whose dollar printing presses it will now have to look as the primary source of cash funding.
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