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?
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.
Completely different scenario. The FDIC guarantee is insurance that depositors pay for. Not a freebie.
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.
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.
Just some more context:
Matt Levine's response to the methodology: http://dealbreaker.com/2013/02/why-should-taxpayers-give-big-banks-a-su…
Bloomberg's response to ML clarifying methodology: http://www.bloomberg.com/news/2013-02-24/remember-that-83-billion-bank-…
Bloomberg article is idiotic.
This. Dealbreaker nailed it once again.I'm impressed he actually read an entire dry finance research article.
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.
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).
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.
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.
Agreed. Made me think of this, which is a really entertaining watch and all the episodes are on YouTube. And it's a true story to boot:
http://www.youtube.com/embed/iNeXxN3Lqok
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).
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.
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/USG15NIM?cid=93
NIM for banks with average assets http://research.stlouisfed.org/fred2/series/US1NIM?cid=93
"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.
Don't hate the player. Hate the game.
"Others may come up with different numbers, but the conclusion is the same: Banks get a very big subsidy from taxpayers. This subsidy distorts markets and encourages banks to become a threat to the economy."
That conclusion still holds water, even if the method has some flaws. There is no doubt that we are propping up the banking industry.
The question is, who is "we"? Half of American adults don't pay federal income taxes.
Just putting a stake in the heart of that one once and for all because I'm tired of hearing it.
With esoteric regulations that prevent new entrants. It's not as if there is no demand for banking and the industry would go under without the support of government. We are just so obsessed with keeping banks more heavily regulated than any other industry.
Government created this problem and is not blaming banks so there can be more "regulations" - aka bigger government.
Roll back GS (thanks Bill Clinton for repealing it). Allow banks to fail. Shrink government.
Done and Done.
Yeah. Whenever someone talks about Federal Income taxes the "well they pay payroll taxes" comes out. Apples and Oranges.
Edit - I am sorry. My response was on topic, but off discussion. I thought we were staying on topic and I was rebutting anyone who falsely claims that the majority of people who don't pay Federal Income taxes are poor/old.
I agree that there is an implicit subsidy and it's wrong, but if the implicit subsidy were gone as a result of legislation that ensured that TBTF wouldn't happen again, wouldn't they just take out less debt/make fewer loans? The optimal balance of deposits/loans would be different in that scenario so I doubt they would be breaking even or going negative in that scenario, although profits would definitely be lower.
I just vote for the party thats answer isn't always more taxes.
Edited
Half this country doesn't pay Federal Income tax. The banks were bailed out using Federal funds.
Real simple. Stop injecting payroll taxes into this because that is not what we are talking. Everyone that works pays payroll taxes.
And the whole point about SSI insolvency is that payroll taxes won't cover outlays.
Smaller government is always the correct answer. Military spending as a % of GDP is very low and lower than in the past.
We need to cut entitlements as they are going to go exponentially.
Also, why is the fact that the rich "control" everything an excuse.
1) That is just an airball statement
2) Everyone benefits from this country. The roads, the laws, etc. Yet this country is funded by shrinking portion of the populace. Wrong and wrong.
Man bro, you can't do simple math lol.
http://www.washingtontimes.com/news/2012/oct/18/welfare-spending-jumps-…
"Federal spending on more than 80 low-income assistance programs reached $746 billion in 2011, and state spending on those programs brought the total to $1.03 trillion, according to figures from the Congressional Research Service and the Senate Budget Committee"
You can't have a discussion about federal taxes and then cite benefits taxed and paid out on the state level. TANF is the federal welfare program. If you want to talk about state taxes, who pays and doesn't, and state welfare benefits, that is a different topic.
Seriously, who has a discussion about the federal government then cites payouts by states as a reason for limiting the growth in the federal government. This is why you have no credibility in the eyes of the majority of americans, or the world for that matter.
Dude, you don't understand the topic you are discussing. I suggest you read up on it before you continue making yourself look like a clown.
Great argument, sound use of facts and reasoning.
Dude, you have no idea what you're talking about. Federal spending on Food Stamps alone was $78 billions. That's not state-level benefits, that's federally funded welfare...
Then why in the graph that you posted does it say that both state and federal food aid totals $63BN. Is your own graph incorrect?
I posted facts above. Are food stamps for the poor? If so then it counts. $75B annual for food stamps. Is Medicaid for the poor? Then it counts.
Simply because your are myopic and do not understand what you are talking about doesn't excuse you. We are discussing aid for the poor, or broadly described as "welfare". TANF is but one part of it.
But continue displaying your lack of being informed on this topic which you attempted to interject yourself into.
LMAO
The chart stops in 2008.
Hahahah
Can't do math and cannot analyze a chart. Holy shit.
Fed spend $80B in food stamp spending in 2012.
I frankly don't see where you are getting state spending.
http://www.scribd.com/doc/110366590/Spending-for-Federal-Benefits-and-S…
This report indicates that it is Federal alone.
Federal Welfare Spending in 2010-11 = $733B
Wow, this has gotten off topic fast. Bottom line, 50% of America isn't doing all the work over the long haul while the other half just always takes, however you parse it out. Here's another chart everyone can argue over: http://en.wikipedia.org/wiki/File:Fy2010_spending_by_category.jpg
I kind of chuckle when I hear that the banks shouldn't have been bailed out. It's like saying they shouldn't have tanked. But they did and it's done, so lamenting the case is pissing in the wind. The banking industry stopped working, so they got temporarily taken over in some cases and went on the dole in other cases, it's pretty simple. It's not unlike when a gov't entity stops working and is privatized: people tend to do what works, especially in the US. Realistically, was the US supposed to endure a potentially decades long complete flatline of the economy in order to maintain some almost hipsterishly obscure notion of "libertarianism"? Not happening. Get over it.
Seeing the banks and government become progressively more interconnected is worrisome because yes, there could come a time where the government doesn't have the resources to stop a crash. It's one thing for a bank to fail, it's another for a lot of banks to fail....it's a completely different creature if the whole system is going to tank. Of course the government is going to do something in that case, a whole civilization can't be crippled because one sector is fucked, that's absurd. We see it in smaller countries when festering local problems or overarching global money problems kill an entire economy, and given the globally interconnected financial developments, it's conceivable that the day may come where a financial panic can deep six the US itself.
I think that's something that should be examined. People don't want governments involved and I get that, but grow up Peter Pan, Count Chocula, they WILL get involved when things get out of control and it's better to address things like this ahead of time instead of just beating the "we want to do whatever we feel" drum. If you look at the government as some alien entity that's disconnected from everything else, then yeah your outlook will be poor in this respect. But if you look at the government for what it is, people participating in the public decision making process, then raising an issue that matters will be heard in some places and then traction can build.
And it's not like the government is the only one that can do something about this. I'm surprised the banking industry hasn't formed a consortium of opinion to address this very question: "What happens if the day comes when no one can prevent us from destroying ourselves? What do we do? And how do we not go there in the first place?" This seems a common sense thing to do and hasn't been done. It's not like financial panics are a mystery, we know exactly what works and what doesn't at this point in history. Would it kill the big banks to get together with the openly stated purpose of discussing "How do we plan ahead to make sure this doesn't happen again?" Until they do, they neglect that their irresponsibility becomes everyone's problem in a crisis, and they kind of force the government to be the one who fixes things
How can you purport to know what would have happened had the banks not been bailed out? On the contrary, I would submit to you that we would have recovered more quickly had we let the entire system be gutted and rebuilt. That's why discussing whether or not we should have bailed out the banks is relevant: many people seem to blindly believe that we would have had a 20 year depression (which is just ludicrous to me) if we let several large banks fail.
LOL I didn't realize the $80B in food stamps was going to rich people. Get real dude. You horribly lost this argument and each reply is just making you look worse.
Massive reduction in the size of government? I pray you are correct.
I wonder whether sequestration will factor into your analysis on the 80 bps spread and comp levels. -____-
What I don't understand is why Republicans make such a fuss about the 47% of people who pay no federal income tax, but don't make the same fuss when big corporations end up paying no federal tax while reaping billions of dollars in profits. You need to be consistent. The people who had no federal liability most likely have low incomes and too much responsibility. They probably have many dependents, and thus, after taking out all their exemptions, end up paying nothing. Basically, they are living paycheck to paycheck, barely scraping by. It is not like the personal exemptions is high at all ($3,900 for each dependent). Corporations on the other hand, make a shit lot of money, and thanks to a lot of loopholes placed on the tax code thanks to their lobbyists, end up paying zero. And this does not cause a revolt in the conservative party. Are you kidding me? So grandma paying zero is bad, but GE paying zero is fine? Aren't corporations people too? What we have in this country is a huge income inequality problem. And the 2008 recession hit harder the lower class, making the problem even bigger. Just look at the following map graph:
http://en.wikipedia.org/wiki/List_of_countries_by_income_equality
How pathetic for the US. Compared to Europe, even Canada, the US is way behind.
Goodness, it is consistently annoying when people assume that if you don't support a bloated welfare government, you must be a Republican. Furthermore, if you took the time to actually read the responses in this thread, you'd realize that we despise loopholes for Fortune 500 companies just as much as loopholes for the wealthy. Our tax code is onerous and ridiculous. It is only the Democrats who seem to be insistent on the idea that we should continue with the system we have in place.
Goodness, that comment was not targeted to you. Is there anything that is not true with my comment? Didn't Republicans, in the last elections, attacked the "47 percent"? While not mentioning the fact that lots of corporation are in "welfare"? And you should get out of the closet and admit to being a Republican. Nothing wrong with that.
Yeah!! Why don't we convert to the European system so that we can pay higher income taxes, with a greater percentage of people on the dole, supported by governments on the brink of financial ruin. That would make everything better!
All of this is predicated on the concept that income inequality is bad. In a free market system, all that income inequality likely indicates is that your country has a great number of extremely successful people who have put far more value into the economy than they have taken out of it.
Furthermore, almost every study of income inequality in the United States that I have read greatly exaggerates the level of inequality by relying on absurd metrics like household income, which distort income threasholds.
Why do you assume that just because there's some European countries that are going broke, that their system is a failure? What about the Europeans countries that are actually not broke? What about Finland, Denmark, Sweden, Luxemburg, Switzerland, Norway, Austria, Germany, Belgium? Do they not exist in your vocabulary? I can venture to say that in all those countries, things are better than in the good old USA.
Income inequality is good. How pathetic for the rest of the world. And how sad for you that you look to the government to equalize life for you.
TNA,
Actually, my political positions are not based on what is best for me. If it was, I would have voted for the Republican party. I actually am in the top 20%, and yes, I do pay a lot of taxes. But that does not change the fact that I vote for the best interest of the nation, not my own. I am doing pretty well without the governments help. How you just assume everyone who has the liberal ideology is a bum is beyond me.
Nobody assumes this.
It's abundantly clear that the system that is in the best interests of the nation is a free enterprise system, with a limited government and free trade. There exists no example of a country that substantially raised its populace's standard of living without a free enterprise system and largely free trade.
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