In the wake of the FDIC’s October 14th announcement that it would guarantee three-year senior unsecured bank debt issued through June 30, 2009, a number of major banks, including JPMorgan Chase, Goldman Sachs, and Bank of America, are airing their concerns and doubts about the effectiveness of the program.
In a letter issued by prominent law firm Sullivan & Cromwell LLP, which represents the interests of nine of the big banks, stated that issues with the program’s guarantee on repayments in default could be clarified, more freedom to choose the service, and higher fees were just some of the problem areas.
With such concerns, it may not be surprising why few US companies have reentered the market even after the guarantees were put in place to support new bank bonds. The same letter noted that a similar program issued in the United Kingdom has had far better results. Originally issued to cover about $20.6 billion, the real sticking point was the program’s unconditional guarantee on principal and interest when due.
The FDIC plan currently lacks this guarantee. The consequence is that US banks are left at substantial disadvantage to UK and European ones. This is largely due to the higher prices of government-backed debt for borrowers, which also make them less interesting to investors.
The six other 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.
Some of the current points being addressed by the banks include the lowering of fees required to preserve the option to issue guaranteed and non-guaranteed debt. The FDIC is interested in adding a pre-paid fee on outstanding debt, beginning from September 30, 2008 to June 30, 2009 in exchange for the ability to issue either while remaining a part of the program.
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