Revealed: How JPMorgan Prints Money

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When a bank earns interest on funds it borrows (i.e., it has a negative borrowing cost), that must surely be the pinnacle of evolution in an industry that traces it modern origins back over 600 years. That's exactly the feat JPMorgan Chase (NYSE: JPM  ) pulled off last quarter, during which it earned 5 basis points (0.05%) on $271 billion borrowed in the repo market!

In the market for free (or better) money
The repo market enables banks to borrow from each other and other institutions on a short-term basis against high-grade collateral (Treasury bonds, for example) that they ultimately repurchase (thus "repo"). Technically, JPMorgan may be something of an oddity with a repo funding cost that has dipped into negative territory, but all major banks are taking advantage of "free money" under the Fed's zero interest rate policy (the repo market takes its cue from the Fed funds rate):


Fed Funds Purchased and Securities Sold Under Repo Agreements*

Annualized Average Borrowing Cost** (100 basis points = 1 percentage point)


$262.1 billion

8 basis points**

Bank of America (NYSE: BAC  )

$255.2 billion

52 basis points

Morgan Stanley (NYSE: GS  )

$187.6 billion

44 basis points

(NYSE: C  )

$154.3 billion

163 basis points

Goldman Sachs (NYSE: GS  )

$143.6 billion

45 basis points

Wells Fargo

$26.0 billion

11 basis points

*Calendar fourth quarter, 2009. Source: Capital IQ, a division of Standard & Poor's.
**This data was collected by a regulatory agency; as such, it may not be perfectly consistent with the data reported by JPMorgan Chase, which is cited in the text. It also includes Fed Funds borrowing.

In my opinion, JPMorgan's negative borrowing cost simply highlights the absurdity of current monetary policy. There is no doubt that setting interest rates at zero has enabled banks to recapitalize their balance sheets by boosting bank earnings. In fact, I'd argue that the policy has been too successful (JPMorgan's net interest income over the prior four quarters was $51.5 billion -- nearly twice the amount for 2007), and at the cost of fundamental distortions in risk-taking behavior by banks and investors.

No more manna from Hea-Ben!
I agree with Federal Reserve Bank of Kansas City president Thomas Hoenig when he said at the beginning of the month that the Fed should raise the fed funds target rate to 1% from its current level of 0%-0.25%. Failing that, I fear banks will be lulled into thinking that the days of manna from Hea-Ben Bernanke will never end, which is just the sort of thinking that got us into this mess to begin with.

Current Federal Reserve policy is creating tangible risks in U.S. stock and bond markets -- but there are alternatives for your money. Tim Hanson highlights the top markets right now.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (13)

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  • Report this Comment On April 20, 2010, at 6:11 PM, bbwamu wrote:

    Here is a thought.

    JPM was literally gifted WaMu. $300B+ in assets, almost $200B in deposits for absolutely nothing. (Hence the $2B in "negative goodwill" booked THUS far...just for starters)

    Talk about free money. I'm quite certain that the WaMu gift has no small part in JPM's doubling of their interest income.

  • Report this Comment On April 20, 2010, at 6:32 PM, JakilaTheHun wrote:

    I'd actually agree that it would be prudent to slowly move the Fed funds rate up to 1% over the next 5 quarters. It's a tightrope-act, however.

    On the one hand, money supply figures suggest we're still not even close to being out of the woods and we have a significant risk of falling back into deflationary territory. On the other hand, you're right that low interest rates encourage speculative risk-taking and if nothing else, gives fuel to bubbles.

    Of course, part of the problem to begin with is that the Feds have consistently been setting too low inflation targets. They strive for 1% - 2% ever since the high inflationary period of the '70s and early '80s; which means they have almost no flexibility to escape once we are in a severe recession like this one.

    If we would set target inflation rates higher, the Federal funds rate would naturally have to follow. This would decrease speculative activity.

    But nothing is simple right now. The counter-argument to that is that by setting higher inflation targets (3%-4% rather than 1%-2%), we'd create higher interest rates, which would then create considerable problems due to our massive budget deficit.

    So we don't escape pain no matter what we do. In general, though, I'd agree that we should go ahead and at least move towards 1% over the next year or so. We might not need to raise it any higher than that, given the severity of credit contraction, but there are so many problems associated with 0% interest, that I believe it would be a less-bad alternative.

  • Report this Comment On April 20, 2010, at 7:06 PM, TMFAleph1 wrote:


    Thanks for your interesting, detailed comments.

    Although I agree that deflation remains a risk, my sense is that the economy could bear a 1% headline rate now, rather than in five quarters' time.

    Nevertheless, an immediate increase to 1% would certainly jolt asset markets: Thanks to the Fed's coddling, investors, mesmerized by the mantra of "exceptionally low rates over an extended period", wouldn't stomach such a rude awakening.


    Alex Dumortier

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