Big banks say FDIC debt guarantee plan isn’t strong enough
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Not that they want to sound ungrateful, of course, but major banks are balking at a new government program that offers to guarantee their bonds.
From Bloomberg News:
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 posted on the agency’s website on behalf of nine banks. The comment period on the interim rules for the FDIC’s Temporary Liquidity Guarantee Program ends today. The comments shed light on why almost a month after the government placed its guarantee behind new bank bonds, no U.S. bank has yet tested the market. By contrast, under a similar program in the U.K., banks have issued the equivalent of $20.6 billion of government-guaranteed bonds.
The U.S. program, however, has been good enough for General Electric Co., which has turned to the FDIC plan to insure up to $139 billion of debt for the company’s GE Capital financial services unit.
The American banks believe the FDIC plan doesn’t offer the ‘unconditional guarantee’ that the British government’s plan extends to that country’s bank debt. The issue appears to center on a question of how quickly the government would make payments to bondholders in the event of a default.
If the U.S. guarantee doesn’t match the British guarantee, investors will demand higher yields on U.S. banks’ bonds compared with what British banks will pay, the Sullivan & Cromwell letter said.
This points up a key problem with different countries’ efforts to battle the worldwide credit crisis by providing massive aid to banks: If the programs aren’t in sync, the banks covered by weaker plans risk being shunned by investors and depositors. That’s the reality of globalization.
The other six banks represented in the letter are Bank of New York Mellon Corp., Citigroup Inc., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Wells Fargo & Co.
Under the FDIC debt plan, banks are automatically enrolled unless they opt out.
FDIC spokesman Andrew Gray told Bloomberg that ‘the nature of the comment period is to get feedback from industry and other stakeholders.’
The FDIC bank debt guarantee program is separate from its main mission of guaranteeing bank deposits.