Guess who wrote this?

Both companies are benefiting from government initiatives to pump liquidity into the markets, including a program that lets many financial companies sell debt with maturities as long as three years and backed by the FDIC. Morgan Stanley has issued $23 billion of such debt; Goldman, $25 billion. Although banks pay a fee of as much as 1% for it, the FDIC guarantees amounts to a subsidy. Without it, the companies likely would have to offer interest rates two to three percentage points higher to attract buyers. So, the two may be getting a subsidy of $500 million or $750 million a year.

The aim of the program, which began in October, is to trim bank-funding costs and encourage consumer and business lending. Goldman and Morgan Stanley, however, make few loans, save for the kind that many in Washington detest — those for job-killing mergers like the pending Pfizer/Wyeth combination.

If you guessed some wild-eyed DFH, guess again. It’s from a story in Barrons (subscription required) touting Goldman and Morgan Stanley as good bets for investors.

If you’re not familiar with Barrons:

Barron’s is America’s premier financial weekly, with in-depth news reports and analyses on global financial markets.

When it veers into politics, it’s decidedly to the right.

Here’s a bit more from the Barron’s story:

The firms dislike acknowledging the benefits they derive from various government liquidity programs, including $10 billion each from the Troubled Asset Relief Program (TARP) and a less-publicized bond-guarantee program from the Federal Deposit Insurance Corp. that has produced more than $20 billion of cheap financing for both Morgan Stanley and Goldman since it began in October.

After the collapse of Lehman, the debt markets were closed to Goldman and Morgan Stanley. Their competitors like JPMorgan derive about 50% of their short-term financing from deposits and 50% from the debt markets. But Goldman and Morgan Stanley have no deposits to speak of. They would be dead in the water without access to this financing. That’s one of the reasons Geithner and Paulson let them become bank holding companies overnight last September, to give them access to this program and others. (A bit tangentially, in July, 2008, two months before its collapse, Goldman/Morgan competitor Lehman asked Geithner to let it become a bank holding company. Geithner refused. My guess is that’s where he got the idea.)

Goldman stuck its toe back into the water in late January with a $2B issue with no FDIC guarantees. The yield on them was 7.79% (as opposed to between 2 and 3% on the FDIC-backed bonds). But they haven’t been back

Bonds issued earlier this year by Goldman Sachs Group Inc. and General Electric without the government’s backing have dropped to 96 cents on the dollar and 73 cents on the dollar, respectively, in recent days. Their government-backed debt trades at or close to their full value of 100 cents on the dollar.

Morgan Stanley hasn’t even tried.

The FDIC program that backs these bond issues is called the Temporary Liquidity Guarantee Program (TLGP). Recently, Chris Dodd introduced a bill, the Depositor Protection Act of 2009, which would allow the FDIC to borrow $500B from the government. "Depositor Protection", a lovely sentiment, indeed. Some even surmised that this was an indication that the government was ready to bite the bullet on nationalizaion for Citibank and/or Bank of America. But a little birdy has told me that the true purpose of this is to backstop the TLGP program. As things are now, FDIC-backed debt can have a maturity of no more than 3 years. But they are planning to extend that to 10 years.

I wrote a diary recently, where I think I make a pretty good circumstantial case that Chris Dodd, at the direct request of Goldman, put language in the stimulus bill making it much easier to repay the TARP money (firms would no longer be required to raise private capital to replace the money). Some of you may wonder, "What’s wrong with that Janushka? Isn’t paying back the money a good thing?" Yes, it is a good thing. But right now, the only legal restrictions on employee compensation apply to TARP recipients. So now many of the TARP recipients are heading for the exits, starting with Goldman. Like Goldman, many of them are big issuers of FDIC-backed debt and, no doubt, will continue to be. Also like Goldman, many of them will also no doubt participate as sellers and buyers in Geithner’s Public Private Investment Fund (PPIF , or as I like to calll it,the no-strings, stealth TARP). Dodd has said that the TARP compensation limits do not apply to the PPIF.

And then there’s the mother of all bailouts, AIG, whose beneficiaries include Goldman and a host of foreign banks (Deutsche Bank, UBS, Societe General, Barclays), who are not TARP recipients.

A bailout is a bailout is a bailout.

A subsidy is a subsidy is a subsidy.

Anyone who gets one must play by our rules.

I sincerely hope that the AIG bonus scandal has been a wakeup call for Obama; that he has learned that subterfuge and non-transparency leads to blow-ups of the kind we are seeing now.

I have written to the White House, all my representatives, the Senate Banking Committee, the House Financial Services Committee, the Joint Economic Committee, and anyone else I can think of telling them that the beneficiaries of all of these bailouts must be subject to employee compensation limits with real teeth in them.

I hope you will too.

Oxdown Diaries

Oxdown Diaries