Debts & Loans

Goldman Sachs yesterday became the first US bank to issue debt backed by the Federal Deposit Insurance Corp under one of several government plans designed to bolster financial companies and stimulate lending.

Fellow US banks were quick to follow Goldman in what could be a $300bn or more market, bankers said. JP Morgan and Morgan Stanley were among those lining up with similar debt sales. A flourishing market for such debt already exists in Europe after deals from UK banks such as Lloyds TSB, Royal Bank of Scotland and Barclays.

Goldman sold $5bn, significantly more than originally expected, with a yield of 3.367 per cent, or a spread of 200 basis points over comparable Treasuries, for debt that has the backing of the US government and matures in June 2012. The spread on the bonds tightened to 185bps in trading.

The FDIC-backed bonds are being issued under the temporary liquidity guarantee programme, one of many federal schemes meant to revive the financial system. At issue now is whether the cash the government is pumping into the banking system will filter through to the broader economy.

"Once banks raise that money, what do they do with it? Will it spur new lending?" asked Jay Mueller, senior portfolio manager at Wells Capital Management.

The FDIC backing allows banks access to cheap funding as they face about $386bn in debt maturing through the end of 2010, according to Standard & Poor's. Sky-high yields and widespread nervousness about the financial health of even the largest of US banks have shut down the credit markets.

"Without the government guarantee, $5bn of three year money would come at a massively higher yield," said Rob Kay, head of the investment-grade syndicate desk at Credit Suisse.

Spreads on corporate debt, and bank debt in particular, have soared to record levels. Existing Goldman debt was quoted yesterday with a spread of 750bps over Treasuries, or a yield of 9 per cent.

Banks are selling the new debt to investors who typically buy obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac.

That has raised questions about the relative appetite for GSE debt, which carries a slightly weaker government guarantee.