Shareholders of Wall Street banks who agree with former Citigroup Inc. Chief Executive Officer Sanford “Sandy” Weill that the companies should be broken up face an obstacle: bondholders.
That’s because trading on Wall Street relies on borrowed money, or leverage, that can be obtained cheaply as long as the traders belong to a conglomerate such as Bank of America Corp., JPMorgan Chase & Co. or Citigroup that gets federally insured deposits. Jefferies Group Inc., a securities firm that isn’t part of a bank and can’t turn to the Federal Reserve for help, currently is charged more to borrow in the credit markets.
“I don’t think there’s a lot of tolerance for risk like there was before,” Scott MacDonald, head of research at fixed-income investment firm MC Asset Management Holdings LLC in Stamford, Connecticut, said in a telephone interview. “Investor sentiment has changed. For many investors, leverage remains a four-letter word and probably will be going forward.”
Goldman Sachs has more than doubled its deposit base to $57 billion since 2008 and wants to raise more because the cost of three-year deposits is about 200 basis points, or 2 percentage points, fewer than issuing three-year debt in the bond market, Treasurer Elizabeth Beshel Robinson said July 24.
When Merrill Lynch’s credit rating was lowered by Moody’s last September, the company responded by seeking permission to move some of its derivatives contracts to the higher-rated and federally backed Bank of America NA subsidiary. The Fed signaled that it favored granting the request, while the FDIC, which would have to pay depositors if the bank subsidiary failed, objected, people with knowledge of the matter said at the time.
Now, the gap is just 7.6 basis points, and was as little as 2.5 basis points last month, the narrowest in more than a year, according to data provider CMA, indicating traders’ perceptions of the two entities’ creditworthiness is converging.
In comparing lenders to industrial companies, Harrison didn’t mention the advantage deposits provide to financial firms. About 22 percent of the $1.68 trillion of liabilities at one of JPMorgan’s subsidiaries were non-interest-bearing deposits, according to a second-quarter report filed with federal regulators. International Business Machines Corp., with the same Moody’s rating, doesn’t borrow any money interest-free.
Bond markets, and some stock investors, may be unwilling to support a large, multinational securities firm that doesn’t have diversified funding, including federally insured deposits and so-called wholesale funding from bond investors.