But if they are using bonds which the fed has valued at face value rather than market value as collateral then this is still effectively free money.

They are only losing .1% of bond value instead of the difference between face and market value.

I think you misunderstand what is happening here. It's not free money, it has a 4.7% interest rate. Taking this loan and using it to buy bonds would just be transferring .1% of the loan value to the fed as the bonds would pay out less than the banks owe.

They may be collateralized by bonds worth even less than that.

If the bonds were worth 80 cents on the dollar than they just traded 80 cents on the dollar for 99.9 cents on the dollar. A good deal if your balance sheet is in such poor shape.

Unless the bank fails that doesn't matter. And the banks won't fail because the incentive to run them is gone now. Everyone will see their deposits are safe and the banks can give the money back with interest.

They can buy longer duration bonds and sell them before the loan is due or even corporate bonds. Yes, it introduces certain risks, but with the endemic banks irresponsibility constantly bailed out by the government, I will not be surprised. But I guess, possible spreads are a bit too small for this scheme to matter.

I mean, SVB did exactly this, and management got fired an equity zeroed out. Other banks aren’t looking at SVB and wishing that was them.