Who's in the mood for a little thought exercise today? Because I came across this Bloomberg piece that claims Wall Street banks get an $83 billion annual taxpayer subsidy and, when you look at it the way they do, it's hard to disagree. The piece further states that the 10 largest banks in America wouldn't even break even without it, so essentially all the comp from bottom to top is a taxpayer handout.
There are a couple of things you have to accept for this to make sense. First, you must acknowledge that Too Big To Fail is enshrined in our policy now, thereby eliminating the vast majority of risk to bank bondholders. Obviously, with minimal risk comes a decreased borrowing cost (or government subsidy, if you will) which the IMF has pegged at 80 basis points.
When that discount is applied to the total liabilities of the 10 largest American banks, it results in an $83 billion taxpayer subsidy (because the banks' safety net is the implied backstopping by US taxpayers). Put another way, without this subsidy America's top banks would barely break even, and some would even lose money.
I realize this is a bit of monkey math (It's not like the banks are getting a check for it from the Treasury. It isn't 2009 after all.). But don't rush to dismiss it, because there is definitely something there.
If you go to buy a car after being on your first job for 60 days, you're going to pay a monster interest rate if they don't laugh you off the lot to begin with. You get your parents to co-sign on the loan, however, and it's a whole other ballgame. It saves you thousands over the life of the loan.
Essentially the US taxpayers are the fretting parents co-signing the loan for the teenage banker's monster truck.
Neither bank executives nor shareholders have much incentive to change the situation. On the contrary, the financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy. The result is a bloated financial sector and recurring credit gluts. Left unchecked, the superbanks could ultimately require bailouts that exceed the government’s resources. Picture a meltdown in which the Treasury is helpless to step in as it did in 2008 and 2009.
With all the news about the sequester flying around right now, I could see cutting off this implicit subsidy becoming a popular notion with the general public (and, frankly, anyone with a love of free markets and an ounce of decency). What I think a lot of folks will fail to realize, however, is that it wouldn't actually save the government any money. On the other hand, it would certainly right an egregious wrong, so that's reason enough to do it in my book, but those well-paid bank lobbyists and scumbag politicians would never let that happen.
Anyway, I'd like to hear what you guys think. Is this an actual subsidy or more just a product of a think tank's need to justify its budget?