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Wall Street Welfare Queens

(Human, 14,365

Points)

on 3/4/13 at 8:30pm

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?

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Comments

You forgot to mention all of

diverse_kanga

(Senior Monkey, 76

Points)

on 2/26/13 at 8:19am

You forgot to mention all of the millions of deposit holders (i.e. creditors) of the big banks who likewise benefit from the surety of federal government backing. So therefore essentially you have taxpayers 'backstopping' their own accounts. Sounds a lot like one giant insurance policy to me.

Yes, it is a subsidy. I sure

BigSwingingDave

(Senior Monkey, 79

Points)

on 2/26/13 at 8:27am

Yes, it is a subsidy. I sure as hell wouldn't co-sign a deadbeat friends loan for nothing in return.

However, I don't think anything can really be done about it though, the government likes to use the banks when necessary, like making loans to poor people to make them feel wealthier so they can get elected. Also, the banks make great scapegoats. Why would the politicians want to get rid of one of their favorite whipping boys? Get rid of the banks then people might actually blame them.

diverse_kanga: You forgot to

Edmundo Braverman

(Human, 14,365

Points)

on 2/26/13 at 8:38am

diverse_kanga:

Completely different scenario. The FDIC guarantee is insurance that depositors pay for. Not a freebie.

How exactly would you cut off

SirTradesaLot

(Senior Neanderthal, 4,509

Points)

on 2/26/13 at 8:40am

How exactly would you cut off this implicit subsidy? If JP Morgan or Bank of America got in trouble, the overwhelming odds are that the gov't would step in and backstop them. Even if the gov't says "we're not going to backstop banks anymore", few investors would believe that statement.

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My WSO Blog

Just some more context: Matt

duffmt6

(Neanderthal, 2,318

Points)

on 2/26/13 at 9:04am

Just some more context:

Matt Levine's response to the methodology:
http://dealbreaker.com/2013/02/why-should-taxpayer...

Bloomberg's response to ML clarifying methodology:
http://www.bloomberg.com/news/2013-02-24/remember-...

"Social cohesion and puritanical morality place roughly on my list of concerns between whether I'll pick up jock itch at the gym this week (not likely, since I don't go the gym) and whether it'll rain in Christchurch, New Zealand next Tuesday."
-Eddie

Bloomberg has been slowly

TNA

(Human, 13,509

Points)

on 2/26/13 at 10:12am

Bloomberg has been slowly disappointing me for some time now. If borrowing costs went up so would lending costs. The banks wouldn't eat it. And all the big banks were profitable before TBTF entered into our vocabulary. So while this means TBTF banks can unfairly borrow at lower costs because of a government backstop, this isn't the same as the government giving direct hand outs.

I'm sorry, but an academic paper is not going to be synthesized down to a BB opinion piece without taking some huge liberties. This is a great example of it.

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I do think it is a subsidy,

MFFL

(Senior Baboon, 202

Points)

on 2/26/13 at 10:32am

I do think it is a subsidy, but I question the 80 bps number, especially because they are applying it to ALL liabilities, many of which don't require interest payments like Minority Interest.

It also includes depositor balances, which are covered by FDIC anyways so the safety of the bank itself isn't too much of a concern. Even if it were a concern, I think checking / savings accounts are pretty interest-rate-inelastic for the majority of people with bank accounts. Did any of you choose Bank XYZ because they paid 11 basis points on savings accounts rather than the 9 basis points of their competitors? It is basically assuming that everyone that uses the bank would demand an additional 80 bps per year on their savings accounts if it weren't for TBTF, which I don't think it realistic. I think it is a foregone conclusion for most people that you earn nothing on checkings / savings accounts, and it has nothing to do with TBTF.

Just for some reference, I looked up JPM and saw they have about $2 trillion in total liabilities. But if we exclude the stuff like Accounts Payable, Minority Interest, and Customer Deposits, which wouldn't realistically pay 80 bps higher without TBTF and look at just long term debt (and its current portion), they have about $685 billion in borrowed money. 80 bps of this would be about $5.5 billion, and after accounting for the tax shield of debt interest payments, this is about $3.5 billion.

This $3.5 billion is a lot of money, but considering the bank had net income of $19 billion in 2011, I would hardly say they would be scraping by without this "subsidy."

The article also assumes that the banks would operate the same without the subsidy, which I don't think is realistic either. I don't think the banks would take out as much debt if they had to pay 80bps more, and I think they would charge more interest across the board as well. The banks provide a necessary service, if their costs went up, they would just increase their prices. The demand for loans, checking, and savings accounts is never going to go away, it just might stall from time to time in poor economic environments.

"Well that's even more than less than unhelpful." - Jack Sparrow

Break up the big banks so

TheKing

(Senior Neanderthal, 5,141

Points)

on 2/26/13 at 10:35am

Break up the big banks so that they are small enough to fail without consequence.

Check out my WSO Blog

Well the too big to fail

n4ver

(Chimp, 1

Points)

on 2/26/13 at 11:07am

Well the too big to fail effect on banks (read hidden subsidies) was already investigated in 2012. The researcher estimated, between 2007 and 2010, simply being too big to fail saved America’s biggest banks a combined $120 billion.
Google for "JPMorgan's $10 Billion Subsidy" and read the businessweek article (sorry, I cannot post the direct link as chimp).

TNA: Bloomberg has been

NorthSider

(King Kong, 1,720

Points)

on 2/26/13 at 11:29am

TNA:

I'm sorry, but an academic paper is not going to be synthesized down to a BB opinion piece without taking some huge liberties. This is a great example of it.

Exactly what was going through my head.

Banks make money on the spread. It's not as if the spread would just close up if the government stopped giving them discounted borrow, they would just shift the spread upwards. All of the bank's clients benefit from this subsidy as well (not that I think that's a good thing).

TheKing: Break up the big

NorthSider

(King Kong, 1,720

Points)

on 2/26/13 at 11:34am

TheKing:

Break up the big banks so that they are small enough to fail without consequence.

Step 1: Take the large banks out from under their shield of bureaucratic red tape that makes building a small financial franchise next to impossible.

Bloomberg definitely puts

DCDepository

(Senior Orangutan, 406

Points)

on 2/26/13 at 11:44am

Bloomberg definitely puts forth an incomplete argument on its behalf and ignores some basic principles of banking (as already mentioned--spread). That said, the way Wall Street and Washington, D.C. operate is the argument for smaller and/or limited and/or Constitutional government. No matter if conservatives or liberals, Republicans or Democrats are in office, the form of governance we have with the revolving door of D.C. bureaucrats and Wall Street executives and with Wall Street money and Congressional politics is inevitably corrupting. This is why I never understood the Occupy Wall Street movement. It targeted the rational players--high finance and finance lobbying to reap excess profits--instead of the big government crony capitalist system that legally entices rational business players.

If you reduce the influence of government on the market then you will inevitably reduce the ability of rich New Yorkers from receiving tax payer subsidies. As a banker myself, the idea that there isn't enough government in banking is breathtaking. We literally have entire departments dedicated to government compliance. Whether the "true subsidy" is $830 million or $830 billion, every penny of that subsidy is made possible through the bureaucracy, much of it the unelected bureaucracy.

NorthSider: TheKing: Break

UFOinsider

(Human, 10,346

Points)

on 2/26/13 at 11:49am

NorthSider:

TheKing:

Break up the big banks so that they are small enough to fail without consequence.

Step 1: Take the large banks out from under their shield of bureaucratic red tape that makes building a small financial franchise next to impossible.

http://www.politixcartoons.com/wp-content/uploads/...

YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...

NorthSider: TheKing: Break

DCDepository

(Senior Orangutan, 406

Points)

on 2/26/13 at 11:55am

NorthSider:

TheKing:

Break up the big banks so that they are small enough to fail without consequence.

Step 1: Take the large banks out from under their shield of bureaucratic red tape that makes building a small financial franchise next to impossible.

Agreed with this 110%. It's EXTRAORDINARILY difficult to start and/or operate a small bank in this regulatory environment. Just on the surface level, without FDIC insurance no bank could prosper; however, obtaining FDIC insurance is like getting into Harvard. Then to keep FDIC insurance and to meet consisent regulatory body oversight, a banking institution has to undergo monster efforts and hire a very expensive compliance staff or department.

There really is little incentive for small bankers to go into business. As a part owner in a bank, I often wonder what the hell it is that I'm doing. I can see that there can be some amazing payoffs, but the likelihood is very small for the typical investment group that would want to start a bank.

I used to go to Bloomberg for

TNA

(Human, 13,509

Points)

on 2/26/13 at 12:32pm

I used to go to Bloomberg for decent and intelligent financial news. Now it has basically devolved into trash. Their opinion piece is completely political and a very simplistic article. Not something I go to Bloomberg for.

http://research.stlouisfed.org/fred2/graph/?id=USNIM

NIM is what we should be focusing on. I suppose their argument is that big banks get a benefit in their NIM because the rate they pay is artificially lower.

NIM for banks with average assets >$15B: 3.25%

http://research.stlouisfed.org/fred2/series/USG15N...

NIM for banks with average assets <$1B : 3.88%

http://research.stlouisfed.org/fred2/series/US1NIM...

"Net interest margin (NIM) is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. It is similar to the gross margin of non-financial companies."

http://en.wikipedia.org/wiki/Net_interest_margin

So if a TBTF bank is borrowing at an artificially lower rate and lending at the market rate, their NIM should be higher than smaller banks which have a high borrowing rate.

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Don't hate the player. Hate

newfirstyear

(Senior Orangutan, 465

Points)

on 2/26/13 at 12:51pm

NorthSider: TheKing: Break

Edmundo Braverman

(Human, 14,365

Points)

on 2/26/13 at 1:46pm

"Others may come up with

Gomez Addams

(Senior Baboon, 195

Points)

on 2/26/13 at 1:51pm

Gomez Addams: "Others may

DCDepository

(Senior Orangutan, 406

Points)

on 2/26/13 at 1:56pm

Government created this

TNA

(Human, 13,509

Points)

on 2/26/13 at 2:00pm

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UFOinsider: NorthSider: T

NorthSider

(King Kong, 1,720

Points)

on 2/26/13 at 2:06pm

Gomez Addams: That conclusion

NorthSider

(King Kong, 1,720

Points)

on 2/26/13 at 2:09pm

DCDepository: The question

UFOinsider

(Human, 10,346

Points)

on 2/26/13 at 2:45pm

YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...

UFOinsider: DCDepository: T

TNA

(Human, 13,509

Points)

on 2/26/13 at 2:51pm

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UFOinsider: DCDepository: T

DCDepository

(Senior Orangutan, 406

Points)

on 2/26/13 at 3:00pm

Yeah. Whenever someone talks

TNA

(Human, 13,509

Points)

on 2/26/13 at 3:06pm

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I agree that there is an

Newspeak

(Orangutan, 340

Points)

on 2/26/13 at 3:23pm

DCDepository: UFOinsider:

evan1482

(Senior Monkey, 76

Points)

on 2/26/13 at 3:27pm

-1

TNA: allow the bottom 25% to

UFOinsider

(Human, 10,346

Points)

on 2/26/13 at 3:39pm

YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...

UFOinsider: Also, per point 7

NorthSider

(King Kong, 1,720

Points)

on 2/26/13 at 3:49pm

I just vote for the party

TNA

(Human, 13,509

Points)

on 2/26/13 at 3:51pm

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evan1482: DCDepository: U

DCDepository

(Senior Orangutan, 406

Points)

on 2/26/13 at 4:00pm

evan1482: Those future

NorthSider

(King Kong, 1,720

Points)

on 2/26/13 at 4:09pm

nm

DCDepository

(Senior Orangutan, 406

Points)

on 2/26/13 at 4:16pm

Edited

DCDepository

(Senior Orangutan, 406

Points)

on 2/26/13 at 4:17pm

DCDepository: No, that's not

evan1482

(Senior Monkey, 76

Points)

on 2/26/13 at 4:46pm

NorthSider: the top 1% of the

UFOinsider

(Human, 10,346

Points)

on 2/26/13 at 4:53pm

YOU JUST GOT TROLLED
http://www.troll.me/images/red-foreman322/dont-you...

Half this country doesn't pay

TNA

(Human, 13,509

Points)

on 2/26/13 at 4:56pm

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Smaller government is always

TNA

(Human, 13,509

Points)

on 2/26/13 at 5:02pm

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UFOinsider: LOL oh hell no.

NorthSider

(King Kong, 1,720

Points)

on 2/26/13 at 5:13pm

NorthSider: That would be an

evan1482

(Senior Monkey, 76

Points)

on 2/26/13 at 6:00pm

-1

Man bro, you can't do simple

TNA

(Human, 13,509

Points)

on 2/26/13 at 6:03pm

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evan1482: Where the fuck do

NorthSider

(King Kong, 1,720

Points)

on 2/26/13 at 6:06pm

http://www.washingtontimes.co

TNA

(Human, 13,509

Points)

on 2/26/13 at 6:08pm

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You can't have a discussion

evan1482

(Senior Monkey, 76

Points)

on 2/26/13 at 6:09pm

-1

NorthSider: evan1482: Where

TNA

(Human, 13,509

Points)

on 2/26/13 at 6:09pm

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evan1482: You can't have a

TNA

(Human, 13,509

Points)

on 2/26/13 at 6:11pm

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TNA: evan1482: You can't

evan1482

(Senior Monkey, 76

Points)

on 2/26/13 at 6:14pm

-1

evan1482: You can't have a

NorthSider

(King Kong, 1,720

Points)

on 2/26/13 at 6:15pm

I posted facts above. Are

TNA

(Human, 13,509

Points)

on 2/26/13 at 6:16pm

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General.

The Company makes no claims that the Materials may be lawfully viewed or downloaded outside of the United States. Access to the Materials may not be legal by certain persons or in certain countries. If you access the Web Site from outside of the United States, you do so at your own risk and are responsible for compliance with the laws of your jurisdiction. These Terms and conditions are governed by the internal substantive laws of the State of New York, without respect to its conflict of laws principles. Jurisdiction for any claims arising under this agreement shall lie exclusively with the state or federal courts within New York, New York. If any provision of these Terms and Conditions are found to be invalid by any court having competent jurisdiction, the invalidity of such provision shall not affect the validity of the remaining provisions of these Terms and Conditions, which shall remain in full force and effect. No waiver of any term of these Terms and Conditions shall be deemed a further or continuing waiver of such term or any other term. Except as expressly provided in additional terms of use for areas of the Web Site a particular "Legal Notice," or Software License or Material on particular Web pages, these Terms and Conditions constitute the entire agreement between you and the Company with respect to the use of Web Site. No changes to these Terms and Conditions shall be made except by a revised posting on this page.

PRIVACY POLICY

The Company recognizes that you are concerned about privacy. We are committed to preserving your privacy and safeguarding your sensitive information. The following statement describes the general information-gathering and usage practices of our sites.

Our staff, contractors, Internet service providers and others involved in this site follow this policy or similarly strict policies regarding your Information.

Disclosure

The Company is committed to fully disclosing our policies regarding the collection, use, maintenance, disclosure and security of personal information obtained from users of our site. The term "personal information" includes a name, address, email address, or any other information which could be used to contact you directly or to identify you personally.

Use and Disclosure Limitations

The Company only uses personal information about its Web site users for specific purposes. We do not share user information with third parties except when we have told users about the disclosures, when we have prior consent, or when required by law.

Use Policy: When the Company gathers personal information from users, we ask for permission first. We also disclose, at the time of collection, how the information will be used by us. Personal information is used for activities such as auto-completion of commonly-used forms and helping us contact you when you solicit information from us.

Disclosure Policy: We do not normally disclose personal information to anyone outside of the Company unless we have previously informed users about the disclosures. However, some data may be used from time to time by outside contractors, including auditors or consultants, to assist us in carrying out necessary financial or operational activities. These uses will be consistent with this privacy policy and all contractors using this potential personal information must agree to safeguard it, to use it only for the authorized purpose, and to return it or destroy it upon completion of the activity.

The Company might be required to disclose personal information in response to a valid legal process such as a subpoena, search warrant or court order.

Although unlikely, it is possible that we may have to make certain disclosures to ensure the security of our Web site, to protect its integrity, or to take precautions against potential liability. In any of these situations, we will take any reasonable steps to limit the scope of the data disclosed.

Web Logs: The Company maintains standard Web logs that record basic information about visitors to our Web site. These logs contain: * The Internet domain from which you came to our Web site. * Your IP address. An IP address is a series of numbers which uniquely identifies your connection to the Internet. Although it is possible in some instances, certain types of IP addresses may be used by interested persons to identify users but we do not attempt to identify users in this way. * The type of browser (e.g., Internet Explorer or Netscape) and operating system (e.g., Windows 98) you use. * The date and time you visited the site, and the pages you saw.

We use Web log information to design our Web site, identify popular features, and in similar ways. We do not try to identify individuals from Web logs or to link Web logs to other user information. However, if someone tries to damage our Web site or use it in an unauthorized or illegal way, we may share Web log information with law enforcement agencies. The Company may provide aggregate information such as the number of users who visit particular pages of the site, or the number of people who link to certain external sites from our site, to other parties.

Changes to Privacy Policy

The Company's features and services will change over time and our information-gathering practices and policies may also change.

While our philosophy of protecting user information from inappropriate uses and disclosures will not change, this policy will be updated occasionally to include any change that materially affects the collection, maintenance, use, or disclosure of personal information.

Accept Terms & Conditions of Use *

User	Silver Bananas
Edmundo Braverman	1118
TNA	1098
CompBanker	873
happypantsmcgee	742
IlliniProgrammer	723
UFOinsider	635
TheKing	620
BlackHat	566
Nouveau Richie	420
cphbravo96	406

User	Banana Points
Edmundo Braverman	14365
TNA	13509
WallStreetOasis.com	12067
UFOinsider	10346
happypantsmcgee	9621
IlliniProgrammer	9233
CompBanker	8507
Siberian Husky	5862
AndyLouis	5814
monty09	5405

Week Month Year All Time Comments
Inspired by comments from this: http://www.wallstreetoasis.com/forums/basic-guide-ramping-up-on-a-company-with-public-information-part-1-of-3 Lets just jump in. <strong>Technology:</strong> In this space there are really two metrics that matter the most, sales growth and EPS... Beginners Guide to Valuation and Metrics By Sector
I'm currently a Private Equity Analyst in Shanghai, China. Academically, I graduated from a target school majoring in Economics and Chinese. I also spent my time at college as the president of an on-campus student organization related to Finance and Economics and a volunteer for a local... Ask me anything… I'm a Private Equity Analyst in Shanghai
You've just gotten that promotion and now you're in charge of a small team. Congratulations! And welcome to middle management. All the hard work and the knowledge you've developed about everything your firm does these past few years has been noticed. But, now you have a small... 7 Things I've Learned About Being A Manager
For better or for worse, there’s a very unique feeling when everything goes completely according to plan yet nobody seems to care or notice. Such is the case with our favorite company of the moment, Tesla Motors. For those unaware, TSLA has rocketed upwards since its Q1 earnings release,... A Perfect Storm
Assuming that you have access to no financial products such as FactSet, Bloomberg, CapitalIQ, Thomson or otherwise, thought it would be helpful to give a step by step guide on how to ramp up on a new company from your home computer. Using FaceBook as an example. Lets go ahead and start with the... Basic Guide Ramping Up On A Company With Public Information (Part 1 of 3)
I work as a long/short equity analyst at a large hedge fund. I've been lucky enough to be more than just a model monkey early on in my career, but have also been exposed to the stress of being measured on returns. I primarily cover consumer and TMT names. I went the typical path (target... I'm a Hedge Fund Analyst - Ask Me Anything
Fellow Primates, We are looking for 1-2 students on each campus to help WSO in its sales efforts to student clubs/career centers, and overall promotion at your school both online and on the ground. Below is a description of the position and benefits...thanks in advance for your help! <a... WSO is Looking for Campus Reps For Summer/Fall 2013 (and beyond)
Someone was asking me about this in PM and I wrote a long and detailed reply about what it is like to work in Big 4 and what advice I would give to people thinking about interning / working there. Thought it might be useful for others so my reply is below. Happy to answer any... Working In Big 4 Audit in London
This is the reaction any analyst who has ever worked in banking has when you say you want to leave banking for business school then come back as a post b school associate... <img src="http://epicpinterestfail.com/wp-content/uploads/2012/11/how-i-met-your-mother-barney-why.gif"... Why You Don't Leave Banking for B School Just to Come Right Back...
<em>Mod Note: This is a syndication from Jared's Daily Dirtnap daily market newsletter. WSO readers qualify for a $100 discount...just email [email protected] and mention "WSO Monkey Discount" You can follow Jared on twitter at @dailydirtnap</em> There I go... In Praise Of High Interest Rates

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