This morning the news broke that JP Morgan Chase & Co plans to sell a benchmark-sized issue of five-year notes that will not be guaranteed by the Federal Deposit Insurance Corp.
The ability to raise debt outside of a formal government guarantee has been proposed by regulators as one of the conditions to a bank being permitted to withdraw from TARP by repaying government bailout funds. The JP Morgan issue is being touted as a sign that credit markets have a new confidence in the banking sector as well as a testament to the stregnth of JP Morgan’s business.
But can JP Morgan really raise non-guaranteed debt? On a purely formal level, we’re sure it can. But in reality, investors in the new debt issued by JP Morgan will enjoy a high level of confidence that the bank remains too big to fail and that the government will likely bailout creditors. In short, the legacy of the TARP and the FDIC debt guarantee will continue to warp the markets. JP Morgan now enjoys a Fannie Mae style implicit guarantee, even on debt that is issued on a “non-guaranteed” basis.
To put it differently, both JP Morgan and the government lack credibility on the issue of market processes. And it’s far from clear exactly how to restore this credibility.