Friday, November 21, 2008

Goldman Sachs: General, count me in

The FDIC announced their final rules on the so-called Temporary Liquidity Guarantee Program, or TLGP (Pronounced "Teelgup"). This is the program that was designed to allow banks to issue FDIC insured debt, ensuring that they'd be able to roll over any debt coming due in the coming months.

The key change in the final rules is that the guarantee will now be timely principal and interest. Under the original rules it would be possible for an investment in a failed bank to get tied up in bankruptcy court, and while the FDIC would eventually pay you, there was no assurance as to exactly when.

Already Goldman Sachs says they will be bringing FDIC insured debt as early as Monday, and I'd expect an avalanche of banks to come with new issues in the next few weeks.

This debt will now carry a full faith and credit guarantee for as long as three years (6/30/12 to be exact). Note that similar debt has been issued in Europe, most notably Barclays who did the first deal in the U.K. That deal was priced at swaps +25. I expect U.S. debt to come wider. To me, its got to trade in context of Agency bonds, which are more like swaps +50, Treasuries +165.

There are three interesting wrinkles here. First, the FDIC bank debt will be explicitly guaranteed, while Fannie and Freddie are not. However, I'm hearing the FDIC stuff will have a 20% risk weighting for banks. That's equal to Agencies currently, but there has been talk that the Agencies will be reduced to 10%.

Finally, there will be extensive supply of the FDIC stuff over the next month or so, whereas the Agencies have done very little term issuance. So given the market's poor liquidity, I'd expect the new FDIC issues to have a new issue concession, and therefore price wider than Agencies.


Anonymous said...

so does citi get a sunday night bailout or do they just issue a ream of this new fdic paper to calm the market?

Accrued Interest said...

Well the rumor was the GS would be the buyer, so maybe that's why GS is already out with the FDIC paper!

John said...

i hate to be this guy... can you post something on the odd behavior of tips vs. nominal treasurys? mankiw channeled barro the other day but i'd love to hear what you think as well...

MauriPel said...

what is risk weighting for other bank debt, corporate bonds and treasury bonds, etc ?
thank you

Accrued Interest said...

You mean the risk wgt for banks? I'm not a banker so I don't know for sure. But I know that the TLGP debt isn't the same as Tsy, at least not for now.