C.M.O. 4.21.2009

Credit Market Overview
April 21, 2009

Last week seemed like a good week to be a bank; GS painted a picture that, if you looked hard enough, contained small rays of sunshine. The view, it seemed, was so rare GS was able to hock it immediately for $5BN in stock which they are using to lead the parade to repay Uncle Sam, or Uncle Sugar as he is more frequently referred to these days given his propensity for largess, the $10BN in TARP funds “forced” on the bank last year.

JPM took advantage of its good earnings news as well but did so in a more daring fashion issuing $3BN in 10-year senior notes not backed by the FDIC. In a little bit of one-up-man-ship with GS, JPM was able to attract buyers at a mere 350bps above the UST 2¾ of 2019 for a total yield of 6.32% to the investor. This was the second non-FDIC backed bond issued by JPM, the first was a Euro 2BN ($2.64BN) deal on March 25th of this year.

The quote on the 10-year maturity CDS contact for JPM was trading at ~140bps at the time of the issue showing that there is still a premium that needs to be paid to get investors to part with real cash.

GS was the first to issue debt without the having the FDIC as a co-signer in a $2BN deal for 10-year paper back in January. That deal came with a 7.50% coupon and a spread above the Treasury curve of 500bps. The 10-year CDS was quoted around 235bps at the time.

JPM has now issued over $5BN giving them the top spot in this category. “J.P. Morgan is in the position to do this; they’ve been stronger than the bigger money-center banks.” Michael Kastner, head of fixed income at Stamos Capital Management said recently.

Jamie Dimon used the bank’s recent good fortune to send his own shot across the bow of that behemoth that shrinks even supertankers known as the U.S. Congress saying that “inadequate regulation of Fannie Mae and Freddie Mac was perhaps the largest regulatory failure of all time.”

Of note here is that while JPM has issued a little over $5BN of non-FDIC backed paper the bank has also issued $40BN in notes with Shelia Bair’s blessing and JPM is not alone. A total of $340BN has been sold since the FDIC started guaranteeing such notes six months ago. BAC has been the other big issuer with a total of $44BN in Bair bonds. The program is officially known as the FDIC Temporary Liquidity Guarantee Program or TLGP if you want to save the keystrokes.

Issuing debt at tighter spreads saves the sellers approximately 200bps which, given all that has been issued, is equivalent to $7BN in debt service that won’t have to be paid by the participating banks.

There have been questions raised as to how TLGP and TARP are related as the second is known to carry onerous oversight conditions and limits on nasty things like bonuses in the tens of millions of dollars range. GS has been the poster child in defining the separation as the $2BN in non-FDIC backed paper they have sold is just a fraction the $29BN of the debt they doled out under the program. David Vinar, GS’s CFO said “As far as we know, they aren’t tied together. There are participants in the TLGP that do not have TARP capital today, and we think that Congress has made it pretty clear that they are interested really in the equity investments in the firms that received TARP capital.”

After the beating the banks took yesterday it would seem that Wall St. is still the kind of place where you have to get while the getting is good.

Enjoy the week.

Jim Delaney