Nothing better demonstrates how government intervention is warping markets than this Bloomberg story breaking the news that GE Capital offered to make a $2 billion secured loan to CIT Group last week. GE Capital, of course, is heavily propped up on government rescue financing and the implicit guarantee that it is too big to fail, while CIT is forced to face the markets without government support beyond the initial TARP injection of $2.3 billion.
CIT reportedly spurned the loans from GE Capital. But the terms illustrate how big of an advantage it is to have the backing of the government. GE offered CIT $2 billion in exchange for collateral worth $10 billion, a 5% up front fee and an interest rate of 13%. GE can borrow that money far cheaper, thanks to its most favoured company status. GE’s long term bonds, for instance, now have a yield of about 7.8 per cent.
To put it differently, GE can now make money on what we might call the taxpayer carry trade. GE has issued about $68 billion of debt guaranteed by the Federal Deposit Insurance Corp. under TLGP, of which $51 billion is longer-term debt and about $17 billion is commercial paper. All it has to do to make money is shovel that out the door and charge higher rates to non-protected companies.
Instead of squeezing the leviathans of finance, we’re rewarding GE Capital for being too big to fail.
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