Although all banks have benefit from the Federal Reserve’s zero-interest-rate policy, some banks have benefited much more than others, with Goldman Sachs (NYSE: GS), JP Morgan Chase (NYSE: JPM) and Morgan Stanley (NYSE: MS) near the top.
Goldman Sachs is benefiting particularly well as a result of the zero-interest-rate environment because of the extremely low interest rate that it is paying on its long-term borrowings. It was released on Wednesday that Goldman Sachs’ long-term borrowing rate was a miniscule 0.92% during the third quarter, which is down from 3.53% during the third quarter of 2008. The $203 billion of debt is Goldman Sachs’ largest single funding source, so as its cost of borrowing plunges, its bottom line benefits as long as it buys solid assets and its trades pay off.
JP Morgan Chase and Morgan Stanley have also benefited, but Goldman Sachs definitely has an advantage over both firms. JP Morgan Chase currently has a long-term debt rate of 2.09%, but JP Morgan is funding a largely different set of assets from Goldman Sachs. Morgan Stanley, which some would argue is a better comparison, but it hasn’t released its third quarter numbers yet. During the second quarter, Morgan Stanley’s long-term debt rate was 3.2% while Goldman Sachs’ rate was 1.26% during the second quarter.
Goldman Sachs was helped during the third quarter by its use of interest-rate derivatives. When using debt that’s issued under a long-term fixed rate, Goldman Sachs has entered into a swap that effectively converts almost all of its debt to a floating rate. As interest rates dropped, one of them main expenses that Goldman has had to pay dropped as well.
Although these types of conversions are common in the investment banking world and has benefited most firms this year, Goldman Sachs has definitely benefited more than Morgan Stanley. Some might contend that the firms use different methods to calculate their cost of borrowing. It’s also possible that Goldman has converted more of its fixed-rate debt to a floating rate.
