Ari Weinberg
More Fine than Finance
Government Shackles Must Really Hurt
Major banks can’t wait to throw themselves from the TARPean Rock.
Take American Express and J.P. Morgan Chase, for instance. Both issued non-FDIC guaranteed debt on May 13. Now in the ranks of several other “banks” (Goldman Sachs, Morgan Stanley, Bank of New York Mellon), these firms are looking to crawl out from the burden of 5% preferred TARP funding by selling common stock or issuing non-FDIC-backed debt.
Where I get caught up is in the speed and pricing. Given the draconian, retroactive rule setting, the TARPtakers are finding operating on government cheese with government strings to be a little uncomfortable. (Refresher, TARP is 5% preferred for 5 years and 9% perpetual preferred after that. But the salary rules and subsequent arguments “if you take X, you must do Y” are taking their toll.)
So, what does it mean when American Express sells 5-year notes at 7.25% just days after Microsoft sells 5-years at 2.95%? Better yet, J.P. Morgan Chase - deemed to be among the strongest banks - priced its 5-year at 4.65%.
Such wide spreads over Microsoft (and Treasurys!) prove that the finance companies will rid themselves of government’s grip at any cost. For J.P. Morgan Chase, of course they would issue the debt. It’s LESS than TARP. American Express - not so much.
American Express - where is the advantage? Are taxpayer bosses, threatening to turn common, really worth the nearly 600 basis point spread to Treasury securities.
Why doesn’t American Express avail itself to government goods until it too can refinance when business settles and spreads come in? What does AmEx know that we don’t which would make them willing to take such a large spread? Could it be that they are taking a real view on rates?
Better lock in those 5, 10 and 30s before inflation starts to make those 9% perpetual preferred look good.
Of course, the Treasury has made the financing decision now one of psychology, employee retention and executive pay as opposed to simple capital structure and finance.
