A Look at J.P. Morgan's Free Money

Home » Financial Institutions » Free money: The government paid JPM to borrow on $271 billion worth of repos

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We know that JPMorgan is not substantially increasing lending anytime soon. And we also know that banks are recapitalizing courtesy of a steep yield curve and near zero rates, what I would call free money.  What I didn’t know is how free these funds truly were. An investor friend pointed out something curious buried deep in JPMorgan Chase’s financial report from Q1 2010, namely that they were effectively paid five basis points to borrow money from the government.

Here’s a close-up of the numbers in question.

This is on page five of the document embedded below. It shows you that JPMorgan Chase earned an average yield of 3.24% more on its assets than it paid out on its liabilities.  This huge margin is in large part due to a steep yield curve and zero rates. The interesting bit is highlighted in red. That is the interest rate that JPM had to pay for Fed Funds i.e. for money borrowed from the Federal Reserve. The number is "“0.05%. That’s right, negative 0.05% for what were $271.9 billion in repo liabilities. That’s unbelievable!

JPMorgan Chase says in the footnote that this:

Reflects a benefit from the favorable market environment for dollar-roll financings in the first quarter of 2010 and the fourth quarter of 2009.

Favorable indeed! But how favorable? Let’s take a look at past JPM filings to see.

JPMorgan Chase does this earnings release financial supplement the same way every year. And it has the last five years’ worth online, which I consulted. Here’s what I found.

You can see how the yield spread has steadily increased over the past six years to where JPMorgan Chase is now making a spread that is 1 1/2% greater than it was in 2004. 

Moreover, the interest it has paid on repos has plummeted. Fed funds rates started coming down in mid-2007 when the subprime crisis blew up, but they fell off a cliff after Lehman hit the wall in September of 2008. As of Q1 2010, JPMorgan Chase was being paid to borrow $271 billion from the government. Talk about free money! I sure wish I could get a deal like that.

Hat tip, Scott.

JPMorgan Chase 1Q2010 Supplement

Related postsJPMorgan has record revenue and $2.7 billion in profitJPMorgan is not substantially increasing lending anytime soonJamie Dimon: ‘we don’t need’ your moneyPaulson is handing out free money like candy to a babyIndustrial & Commercial Bank of China

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Edward is the founder of Credit Writedowns, a former strategy and finance executive who started out long ago as a diplomat. Edward speaks six languages, so expect to see a translated text or two in his writings. From an ideological perspective, Edward calls himself a libertarian realist: a firm believer in the primacy of markets over a statist approach. but not in an ideological way. Often government intervention and oversight is not just wanted but warranted. Edward holds an MBA from Columbia University and a BA in Economics from Dartmouth College. Contact him at feedback at creditwritedowns dot com.

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