naked capitalism

In the wake of the Treasury Department foisting equity infusions onto nine banks, not all of which wanted or needed them, the industry has decided to get in front of these initiatives. The latest bright idea. of guarantees of bank debt, gets a thumbs down from the intended beneficiaries. But sadly, it isn’t the general concept they object to, but the particular version on the table. Predictably, they want to pay less and get more.

One wonders if the government bond guarantee program was designed with intent so as not to be used, but be ready in sketch form to be sweetened if conditions deteriorated further (note this plan is under the aegis of the FDIC, and Shiela Bair appears to be straightforward, but the concept was likely cooked up at the Treasury and the details negotiated with the FDIC).

From Bloomberg:

JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. are among banks that told the government its program to back their bonds is flawed because it doesn’t have a strong enough guarantee.

The Federal Deposit Insurance Corp. guarantee for repayments in default needs to be clearer, fees are too high and banks need more freedom on whether to opt in, according to a letter from law firm Sullivan & Cromwell LLP posted on the agency’s Web site on behalf of nine banks….

The comments shed light on why almost a month after the government placed its guarantee behind new bank bonds, no U.S. company has yet tested the market. By contrast, under a similar program in the U.K., banks have issued the equivalent of 13.9 billion pounds ($20.6 billion) of government-guaranteed bonds…..

The letter cited the U.K. program as a model because it offers “an unconditional guarantee” of principal and interest when due. Without a similar guarantee, U.S. banks will be “at a significant disadvantage” to their U.K. and European counterparts because their government-backed debt will be more expensive for borrowers and less attractive to investors, the letter said.

Yves here. This logic helped get the US in trouble in the first place, a regulatory race to the bottom. Now we are getting it on the subsidiy side, as the industry hoovers up everything it can. And by all accounts, banks have excess reserves at the Fed. suggesting that they are in no mood to lend, independent of the government guarantees. The bond issuance argument is a red herring.

Back to the article:

Banks asked the FDIC to reduce the fee they must pay to preserve the option to issue both guaranteed and non-guaranteed debt. The FDIC wants to charge a pre-paid fee of 37.5 basis points on outstanding debt as of Sept. 30, scheduled to mature on or before June 30, 2009, in exchange for the freedom to issue both while participating in the program. The group of banks wants to reduce that to a 75 basis-point fee on 25 percent of the outstanding debt. A basis point is 0.01 percentage point.

The other six banks represented in the Sullivan & Cromwell letter were Bank of New York Mellon Corp., Citigroup Inc., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Wells Fargo & Co.

Credit Suisse Group AG sent a separate letter to the FDIC on Nov. 4.

Without rules that “fully and irrevocably” guarantee repayment, the size of the program and the number of banks that participate will be “significantly below the expectations of the FDIC, the industry, and all interested parties in the health of the U.S. banking system,” wrote Fred Sherrill, managing director at Credit Suisse Securities USA LLC in New York.

Interim rules for the government program fall short of traditional bond guarantees because they leave the timing of principal and interest payments in the event of a bank default open to changes by bankruptcy courts, Sherrill wrote….

Standard & Poor’s issued a report Nov. 10 supporting the banks’ position on the guarantee…

Last week, the agency extended the deadline for banks to choose whether to participate to Dec. 5, so they could “fully consider” the final rules before making a decision.