Banks float government-guaranteed corporate debt securities and reap huge profits

Posted Jul 27th 2009 1:00PM by Connie Madon
Filed under: Market Matters, Money and Finance Today, Federal Reserve

Have you ever heard of the FDIC's Term Liquidity Guarantee Program (TLGP)? Most people haven't. Its been kept under the radar and it has turned out to be a real bonanza to banks issuing corporate debt.

How does it work? The program was started last November by the FDIC and guarantees the issuance of bank debt securities at much lower interest rates. In the second quarter alone eight of the largest issuers of corporate debt cut interest rated by $24 billion under the TLGP.

Let's take a specific example. Goldman Sachs Group Inc. (NYSE GS) issued $5 billion in debt maturing in 2012 at an interest rate of 3.25%. At the same time, the outstanding Goldman debt maturing in 2012 yielded 8.51%. The gap between the two interest rates will save Goldman $754 million over the life of the bonds. Goldman will reap about $2.33 billion on all corporate debt sold under TLGP.

Other companies reaping huge profits in this way are:

Citigroup Inc. (NYSE C) saved $600 million on $44.6 billion of debt issued.
Goldman is saving $205.5 million every quarter.
GE Capital will likely save $3.3 billion.
JPMorgan Chase & Co. (NYSE JPM) will reduce financing costs by $3.1 billion, or $246 million per quarter.

The program is scheduled to end in October. Some surcharges apply after April 1.

Do you believe that we should end the TLGP program now?

Tags: Citigroup, FDIC, GE Capital, Goldman Sachs, GS, inthenews, JPM, JPMorgan, TLGP