In his annual letter to shareholders, Warren Buffett warned that it was “better to be a financial cripple with a government guarantee than a Gibraltar without one.”
Strong firms like Berkshire Hathaway that aren’t on the dole were paying more for cash than its practically bankrupt competitors.
That’s not just theoretical, notes Bloomberg:
Buffett’s firm paid more for its latest debt offering than Fannie Mae (FNM) and Freddie Mac (FRE), the mortgage lenders that lost a combined $108.8 billion last year. Bank of America Corp (BAC). is also paying lower interest on notes under a program in which the U.S. agrees to guarantee debt.
The difference in borrowing costs illustrates how government aid is giving an advantage to companies that needed multiple helpings of U.S. rescue funds. Each of the companies except for Berkshire were able to find buyers for notes paying 2.375 per cent or less because of their government backing, while Berkshire will pay 4 per cent to bondholders who bought $750 million of the firm’s AAA-rated debt last week.
Fundamentally, this is why the talk of Q1 profitability for these banks means nothing. Their cost of capital is obviously grossly divorced from reality. And so sure, over the short term, various financials may report results that are called “profits”. But if you look at business models, and whether they’re actually still able to make money on the spread in a normal environment, they could still be toast.
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