J.P. Morgan Shows Confidence With Non-Guaranteed Debt Issue

J.P. Morgan, like Goldman Sachs a few months ago, impressed investors by issuing bonds without government backing. But building up confidence in the markets isn’t the only reason to do so.

Some banks like BB&T have reported better-than-expected earnings results for the first quarter, fueling confidence in parts of the capital markets. J.P. Morgan not only beat earnings forecasts, but it also brought some optimism with a $3 billion 10-year bond issue that wasn’t guaranteed by the Federal Deposit Insurance Corporation.

There are several reasons for the very few banks that can to issue debt not guaranteed by the FDIC. Only two banks have done so since the beginning of the program because it’s still more expensive.

The most obvious one is that it proves a bank can raise money on its own. Bloomberg columnist David Reilly noted that it may be a stronger sign of health than repaying money borrowed from the government under the Troubled Asset Relief Program. For that reason, he said that the bond issuance put J.P. Morgan ahead of Goldman — which, it’s true, may soon repay the money it borrowed from TARP but which issued only $2 billion of non-guaranteed debt back in January. Goldman Sachs may not be behind for long though: CFO David Viniar said in a conference call this week that Goldman may issue additional non-guaranteed debt again this year, even if the FDIC program remains attractive.

There are other reasons to issue non-guaranteed debt. The FDIC program, called the Temporary Liquidity Guarantee Program, may allow banks to secure lower rates than without any government guarantee. But fees charged by the FDIC have gone up this month to reduce large banks’ dependence on the program. It has made the TLGP less attractive than it was at the beginning of the year.

Additionally, issuing non-guaranteed debt allows banks to diversify the maturities of their bonds, avoiding the need to repay too much debt at the same time. That’s because the FDIC only guarantees three-year bonds.

Another downside to the TLGP is that banks issuing FDIC-guaranteed bonds aren’t allowed to use the proceeds to repay existing debt. But in the current environment, the trend at banks has been to shrink balance sheets in part by reducing the amount of leverage and debt they hold. Unfortunately, the TLGP doesn’t support that for now.