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[DewDiligence]

[OT] How Do You Spell Sweet Deal? T-L-G-P

[While TARP has become a household name, the big giveaway by the federal government has been a lesser-known program called TLGP. TLGP, not TARP, is the program responsible for the wide interest-rate spreads that have generated the recent uptick in earnings from by money-center banks. The banks have been able to issue medium-term, TLGP-backed debt at essentially the same interest rates the government itself gets on T-Bonds, which are near an all-time low. Nice work if you can get it!]

http://online.barrons.com/article/SB124001886675331247.html

›The FDIC's Temporary Loan Guarantee Program is a boon for banks.

April 18, 2009
By ANDREW BARY

To escape federal interference on pay and other matters, Goldman Sachs and other big financial firms are eagerly seeking to repay the government's TARP equity investments.

But none of them are talking about leaving a Federal Deposit Insurance Corp. bond-guarantee program that benefits them much more. Goldman (ticker: GS) has issued $29 billion of low-cost debt through this FDIC program; Bank of America (BAC), $44 billion; and JPMorgan (JPM), $38 billion. In total, about $340 billion of debt has been sold under the six-month-old arrangement, called the FDIC Temporary Liquidity Guarantee Program (TLGP).

Goldman has made the most progress in its efforts to repay TARP money, by raising $5 billion of common equity last week -- half of the $10 billion Troubled Asset Relief Program investment that Uncle Sam made in the company last October. But the ability of Goldman, and of competitors such as JPMorgan and Morgan Stanley (MS), to repay TARP hinges on the approval of federal regulators, who may nix the repayment idea -- partly because the companies continue to be helped by government-liquidity programs like the TLGP.

Participants probably are saving about two percentage points in annual interest costs by selling debt with FDIC guarantees, rather than by issuing debt on their own. For Goldman, this could add up to $600 million in yearly savings. For all the players, the figure could be $7 billion.

Goldman's view is that TARP should be considered separately from the Temporary Liquidity Guarantee Program, which it acknowledges is an important funding source. Goldman maintains that repayment of TARP shouldn't affect its continued ability to use the FDIC's guarantee program, which is due to expire in the fall.

"As far as we know, they aren't tied together," David Viniar, Goldman's chief financial officer, said on a conference call Tuesday [wishful thinking, IMO], in which he discussed the Wall Street firm's first-quarter earnings of $3.39 a share, about double the consensus estimate and aided in part by TLGP.

"There are participants in the FDIC guarantee program who [do] not have TARP capital today, and we think that Congress has made it pretty clear that they are interested really in the equity investments in the firms that received TARP capital," Viniar added.

The TARP money, which was forced on a reluctant Goldman by former Treasury Secretary Hank Paulson in October, is a preferred-stock investment, designed to boost banks' capital and thus make them more willing to lend money. However, the investment community now is focused on a narrower capital ratio based on tangible common equity, a measure that excludes preferred shares. While TARP has done little to boost lending, Congress still views it as "bailout money" that gives the government a say-so in recipients' management.

As is often the case, Congress is focused on the wrong thing. The government continues to provide major benefits to financial companies and, arguably, should have some input. But TLGP, not TARP, is the feds' biggest source of largesse to financial firms.

Goldman would love to repay TARP and get back to doing business more or less as usual, paying its employees whatever it wants to pay them [#msg-36997343]. Back in its record year of 2007, Goldman shelled out $20 billion in compensation and benefits, or more than $670,000 for each of its 30,000 employees. Their compensation fell about 50% last year. But in the first quarter, analysts estimate, the company was already accruing compensation expense at a rate of more than $600,000 per worker.

Goldman wants to have it both ways. It wants the explicit and implicit financial benefits that come from Uncle Sam, including the widespread perception that it is "too big to fail," and it also wants to be relatively unfettered in its ability to pay people and make investments. Even after raising $5 billion of equity capital last week in a common-share offering, Goldman's tangible common-equity-to-assets leverage is still 20-to-1. Goldman's effective leverage admittedly is lower, considering that its $925 billion of assets includes $164 billion of cash and a sizable amount of customer investments.

It has been difficult and costly for most financial companies to issue bonds on their own [i.e. bonds not backed by TLGP] after Lehman Brothers' collapse in September shook up the corporate fixed-income market. Since then, there have been only a handful of debt sales. Goldman has floated just one issue; in January, it sold $2 billion in 10-year debt at a rate of 7.50%. Those bonds now yield about 7%, more than four percentage points above the 10-year Treasury note.

Compare that to the 2% debt that Goldman has regularly issued under TLGP, which limits debt guarantees to three years. The FDIC charges participating financial companies a fee that now stands at just over one percentage point annually for debt with a maturity of one year or more. Even after paying that fee, financial companies get a windfall, because the all-in cost of FDIC-backed debt is much less than what they would pay to borrow on their own.

Some Wall Street analysts wonder if Goldman will be given regulators' approval to repay TARP, partly because it hasn't been able to sell much debt without an FDIC guarantee. In a client note last week, Barclays Capital analyst Roger Freeman wrote that Goldman appears to "waging a [public-relations] campaign to pressure regulators... to allow repayment. We still wonder why the [Federal Reserve] would allow repayment by a major financial institution at this point without the entire payment coming from private proceeds. We know Congress has made such a provision, but we would think the Fed would still see most of the reasons for large financial institutions' having received TARP as still existing. Notably, neither Goldman Sachs nor any other financial institution has demonstrated an ability to access the unsecured-debt-financing markets in size at a reasonable cost without government guarantees."

On Goldman's earnings call, Viniar said the company still had additional capacity to issue FDIC-backed debt at "pretty attractive spreads." The remaining amount available to Goldman under the program is probably about $7 billion.

Access to the FDIC program isn't automatic, and is highly sought. General Motors Acceptance Corp., minority-owned by General Motors (GM), and CIT Group (CIT) are still awaiting approval to participate. CIT's share price is stuck around $4, a fraction of book value, and probably will rally if it gets the nod from the FDIC.

An always-opportunistic Goldman is making use of a program that was designed to encourage lending, not cheaply finance its trading positions. When FDIC Chairman Sheila Bair unveiled the program in October, she said its aim was to "unlock interbank credit markets and restore rationality to credit spreads. This will free up funding for banks to make loans to creditworthy businesses and consumers."

Goldman, however, does little lending. In fact, Viniar, its CFO, boasted on the earnings call that it has "virtually no direct exposure to the consumer." It is true that more traditional banks, such as Bank of America and Citigroup (C), have used the TLGP program to finance their trading positions. But at least they are sizable providers of consumer and business credit.

There is no denying that Goldman is well managed; Barron's heralded its resurgence and that of its longtime rival Morgan Stanley in a cover story in March [#msg-36354126]. But it will be interesting to see if the firm, which has led a charmed existence thanks in part to well-timed help from Washington, can pull off another coup in escaping TARP's smothering embrace, while clinging to the FDIC program that lets it profit by issuing debt backed by Uncle Sam.‹