States don’t need to take loans from JP Morgan
Jamie Dimon, the CEO of JPMorgan Chase, made headlines this week for an interview at the Council on Foreign Relations in which he said that buying Bear Stearns in March, 2008 was a â€śfavorâ€ť to the Federal Reserve, and that JPMorgan had lost money on the deal. But there was another part of his interview where he talked about lending to states that caught my attention:
DIMON: OK, so — (laughs) — this company, JP Morgan and Chase — (inaudible) — went through ’06, ’07, ’08, ’09, 2010, 2011, 2012, never lost money in a quarter, didn’t need TARP and was there for a lot of people when others weren’t. California, New Jersey, Illinois, hospitals, schools, businesses.
I think that Mr. Dimon is inferring that California, New Jersey and Illinois, which have had severe cash flow problems, had had to rely on JPMorgan to tide them over until they completed their next bond offerings. I remember all these financings; there was very little data available about the borrowing costs and terms. Although these loans are for public entities, the current MSRB rules exempt bank loans from disclosure. This is mind-bending when you consider that JPMorganâ€™s purchase of Bear Stearns required voluminous public disclosure to protect shareholders. There are no such rules to protect taxpayers.
It turns out that JPMorgan did exceptionally well when it helped finance a bridge loan for California in October, 2010. Bloomberg reported the details (emphasis mine):
California used a $6.7 billion bridge loan from JPMorgan Chase & Co. and five other banks in October, when a record 100-day budget impasse prevented Lockyer from issuing RANs. The notes are commonly used for cash flow.
California paid 1.4 percent on the October loan, which was repaid when the bulk of taxes were collected later in the year.
California borrowed for a very short period, less than one year, and paid 1.4 percent interest to JPMorgan and the other lenders. At the same time, Californiaâ€™s short term bonds were trading at 0.68 percent for one year paper, according to Thomson Reuters Municipal Market Data. The loan cost California about $4 million more than the bond market rates to borrow for one month. Itâ€™s hard to see how JPMorgan and the other lenders were doing California any favors.
There is, in fact, another option for short-term borrowing that could save California, Illinois, New Jersey, Puerto Rico and other states in interest costs. The Federal Reserve open market operations offer short-term borrowing. This borrowing access for states is already codified in the law, Federal Reserve Section 14 (emphasis mine):
To buy and sell, at home or abroad, bonds and notes of the United States… and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States.
It must be easier for a state treasurer to call JPMorgan and secure execution of a multi-billion dollar loan in a of couple days. But that convenience costs taxpayers a lot of money. It also provides less transparency for taxpayers than if it was done through the Federal Reserve. The cash flow needs of states will keep short-term borrowing around for some time. As interest rates increase, states shouldnâ€™t rely on Jamie Dimonâ€™s bank to cover their short falls. The Federal Reserve is, after all, the lender of last resort.