Goldman Sachs (NYSE:GS) filed its quarterly report with the SEC on Wednesday, giving investors a peek at just how consistently profitable its trading activity was in the third quarter. The bank made over $100 million in daily profits on over half of the 65 trading days in the quarter, recording just a single daily loss. There's another number in the report that helps to explain this extraordinary profitability; unfortunately, it also highlights the massive distortions the "too big to fail" doctrine creates in our capital markets.
0% financing available for all qualified speculators (almost!)
The number I'm referring to is Goldman's long-term borrowing cost during the third quarter -- an absurdly low 0.92%. Goldman is an extreme, but, as the following table shows, the large investment banks are all benefiting from an enormous implicit subsidy from the federal government:
|
"Too-Big-to-Fail" Banks |
Average Interest Rate, Long-Term Borrowings -- Q3 2009 |
Average Interest Rate, Long-Term Borrowings -- Q2 2009 |
|---|---|---|
|
Goldman Sachs (NYSE:GS) |
0.92% |
1.26% |
|
Morgan Stanley (NYSE:MS) |
Filing not yet available |
3.20%* |
|
Merrill Lynch (part of Bank of America (NYSE:BAC)) |
Filing not yet available |
3.67%** |
|
JPMorgan Chase (NYSE:JPM) |
2.09% |
2.60% |
|
Highly Rated Corporates |
|
|
|
Berkshire Hathaway Finance Corporation, (debt guaranteed by Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B)) |
Filing not yet available |
4.3%*** |
|
Johnson & Johnson (NYSE:JNJ) |
5.42% |
5.42% |
*For the six-month period ended June 30, 2009.
** Weighted average interest rate for debt issued by Merrill Lynch and its subsidiaries at June 30, 2009.
*** As of June 30, 2009. This rate covers short- and long-term borrowings.
Source: Company filings.
What could justify the disparity between the borrowing rates of investment banks against those of a staid conglomerate and a pharmaceuticals giant? Surely no-one will argue that the business and financial risk of Berkshire Hathaway (total debt to equity ratio: 33.9%) or Johnson & Johnson (NYSE:JNJ) (29.4%) is greater than that of Goldman Sachs. The only explanation I can see is the government backstop (something Goldman shareholders can't rely on, and they definitely haven't been properly compensated for the risk they have been running).
Don't let's leave taxpayers on the hook again
U.S. financial authorities must tackle the problem of "too-big-to-fail" head-on. I can't think of anyone in any position of responsibility that has even publicly entertained the idea of breaking up financial behemoths. In Europe, EU competition authorities are forcing Royal Bank of Scotland, Lloyds TSB and ING to break themselves up in exchange for state aid. If we can't find the will to address this rotten state of affairs, U.S. taxpayers will simply continue to subsidize excess investment bank profits.
U.S. Government policies are having other nefarious consequences. Read this because the dollar is doomed.
