Last night, it was reported that Goldman would raise $2 billion through FDIC-backed bonds, but actually they raised $5 billion. That FDIC guarantee is worth a lot, as the cost of capital is way lower than the loan shark rates Goldman has to pay on the open market:
MarketWatch: Goldman Sachs on Tuesday sold $5 billion in notes maturing in June 2012. That’s a larger amount than was being discussed on Monday, indicating the degree of investor demand for the securities. The FDIC guarantee is deemed by analysts and investors as equal to the full faith and credit of the United States and even better than the implicit guarantee of debt issued by the big mortgage-finance agencies, Fannie Mae and Freddie Mac.
We have what most people perceive to be a really clear guarantee, which was pretty important for the marketplace,” said Spencer Lee of the fixed-income trading desk at SCM Advisors LLC, which manages about $5.8 billion. “The banks are going to try to get everyone to buy it that has an iota of interest.” Goldman sold the notes to yield 3.367%. That’s about 2 percentage points more than 3-year Treasury debt, a big improvement over the record-high rates that banks were being forced to pay for unsecured debt in the corporate-bond markets.
We’re not surprised to see investors snap up government-backed debt that offers more than a negligible yield. Although there must be some doubt the security of the guarantee, or else the spread wouldn’t be that wide.
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