FDIC Loan Guarantees To Banks Soars 54% – Is The TLGP Saving Problem Banks?

FDIC Debt Guarantees Soar 54% From Year End 2008

The FDIC Temporary Loan Guarantee Program (TLGP) was instituted late last year.  The program’s stated purpose and goals, according to the FDIC, is as follows:

The FDIC has created this program to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount.

The Debt Guarantee Program provides a full guarantee of senior unsecured debt issued by eligible institutions between October 14, 2008, and June 30, 2009, with the guarantee expiring on or before June 30, 2012.

The TLGP does not rely on taxpayer funding or the Deposit Insurance Fund. Both components of the program will be paid for by direct user fees.

According to submissions received by the FDIC, more than 85 percent of FDIC-insured institutions have opted in to the Transaction Account Guarantee Program, and more than half of all eligible entities have elected to opt in to the Debt Guarantee Program.  The Transaction Account Guarantee Program provides a full guarantee of non-interest-bearing transaction deposit accounts above $250,000, regardless of dollar amount, at depository institutions that elected to participate in the program.

Sixty-four financial entities-39 insured depository institutions and 25 bank and thrift holding companies and nonbank affiliates-had $224 billion in guaranteed debt outstanding at year-end. (2008)

Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program (fdic.gov)

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Debt Issuance under Guarantee Program
(dollar figures in millions) May 31, 2009	Number	Debt Outstanding	Cap1 for Group	Debt Outstanding Share of Cap
Insured Depository Institutions
Assets <= $10 Billion	46	1,636	3,097	52.8%
Assets > $10 Billion	21	58,900	315,171	18.7%
Bank and Thrift Holding Companies, Non-Insured Affiliates	34	285,242	466,741	61.1%
All Issuers	101	345,778	785,009	44.0%

As of the end of May 2009 borrowings guaranteed by the FDIC increased by 54% ($122 billion) from year end 2008 and the number of institutions using the TLGP increased from 64 to 101, an increase of 57%.  Although the worst of the financial crisis seems over for the banking industry, it seems that some banks would not have been able to raise the necessary capital to remain solvent without the TLGP.

The increased level of guaranteed borrowings, totalling almost one third of a trillion dollars, indicate continued stresses in the banking system.  Without the FDIC guarantee, investors probably would not have purchased much of the $345 billion in debt issuance by the banks.

It is somewhat difficult to decipher exactly how much stress the increased level of TLGP borrowings indicate.  Some banks may simply be taking advantage of the opportunity to sell or refinance debt at a lower cost than would otherwise be possible without the TLGP guarantee, as noted recently in Barrons.

Banks want to pay off Uncle Sam to escape his pay restrictions, while still profiting from his guarantees on their debt. Some analysts contend that banks should be constraint-free only if they repay from private proceeds.

Some major TLGP participants.

	FDIC-Backed	TARP
Company	Bonds (bil)	Equity (bil)
Bank of America	$44	$45
JPMorgan	38	25
GE Capital	37	0
Goldman Sachs	29	10
Citigroup	27	50
Morgan Stanley	24	10
Wells Fargo	NA	25

Courtesy: Barrons

It is unimaginable that any of the above institutions are at risk of failure.  The total TLGP bonds sold by this blue chip group amounts to $199 billion or 57% of FDIC backed debt.

One indication that some banks utilizing the TLGP see it as more that a “short term” guarantee is seen in the maturity schedule of the guaranteed debt.   The amount of insured debt with a maturity of less than 181 days was 49% of total guaranteed debt at year end but declined to only 23% of debt as of May 31, 2009.  Debt with a maturity between 2 to 3 years increased from 39% of borrowings at year end to 56% ($195 billion) as of May 2009.

The large amount of debt guaranteed by the FDIC ($345 billion) for a relatively small number of banks (101) indicates that much of the borrowing is being done by larger banks as seen in the above table.  The information not disclosed by the FDIC that would be very interesting to know is how much of the TLGP  borrowings are being done by banks on the Problem Bank List?

On a positive note, besides possibly preventing a much larger banking crisis, the FDIC loan guarantee program to date has resulted in the FDIC earning $8 billion dollars.  If the FDIC incurs no major losses on their loan guarantees, the TLGP might just turn out to be profitable for the taxpayers.