If you are like us, you have probably waited until this weekend to get most of your holiday shopping done. Face it. You have had other responsibilities like procrastinating putting the holiday lights up or watching college football. The reality is most of us will continue this attitude right through the weekend to the 23rd, at which time we will panic. This is were the practice of giving coupons for back rubs, wrapping batteries separately to make it look like you are giving more gifts than you actually are and giving kitchen appliances reaches an art form. Hopefully, the extra time you save wondering aimlessly around shopping malls this season can be better spent on managing liquidity for 2009.
On that topic, we wanted to check your interest in either issuing or investing in FDIC insured guarantee liquidity obligations under the Temporary Liquidity Guarantee Program ('TLGP"). We have been hard at work on this for the past month and are close to bringing the product to market, but we could use some help to better understand both supply and demand. Since this is a new market, we are in unchartered territory and so we seek information in order to better meet bank's needs.
Banks will be able to take advantage of this program in two ways. Some banks will issue to raise funds, some will invest and many will do both at different times. Here is a quick recap of each position:
Issuing: Banks that are looking to fund themselves can do so under this program. Utilizing the guarantee, banks can have access to funds, at prices that would not normally be available. While these are considered wholesale funds, they will help diversify liabilities and give banks another tool to structure different maturities. Issuing under this program will keep FHLB lines available, will not use up precious collateral and will provide a new source of funds. It should be noted that while Bank of America and others have issued at levels of 85bp above the swaps curve, community banks will have to pay more for two reasons. One, Bank of America issued $6B, providing global investors with suitable liquidity. The second reason is that while the obligation is the same general risk (because of the guarantee), there are differences. Should a bank fail, there is an associated delay in getting principal and interest repaid. In addition, there is a period of time when interest stops accruing at the time of bank failure. While this is minimal, investors do take this into account when pricing. Because of this fact, pricing in the 2Y and 3Y area is approximately 30bp to 45bp more than where a large national bank has issued.
Investment: The instrument offers an excellent way to add low risk investments to the balance sheet that are 20% risk weighted. These obligations will all be bullet maturities so they present an excellent alternative for use in a leverage program. For reasons mentioned above, pricing on community bank guaranteed obligations are slightly higher than national bank issuance. While the difference is a little more liquidity risk, banks that plan to hold the investment to maturity, can garner additional earnings.
These obligations can be structured as a loan, security, deposit or one of many other structures in order to help meet 2009 asset/liability goals. To see specific proposed terms and to get a glimmer of what we have in store, if you are a bank that has opted in for the TLGP Guarantee Program, click below to take a quick survey and register your interest (in either issuing or investing). In this manner, unlike the recipients on our holiday gift list this year, we will be able to better deliver something that you need. To see more, go to:
http://www.zoomerang.com/Survey/?p=WEB228MXGW5DKJ