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):

Bank

Fed Funds Purchased and Securities Sold Under Repo Agreements*

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

JPMorgan
(NYSE: JPM)

$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

Citigroup
(NYSE: C)

$154.3 billion

163 basis points

Goldman Sachs (NYSE: GS)

$143.6 billion

45 basis points

Wells Fargo
(NYSE: WFC)

$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.