An Amount Equal To The Sequester Savings Is Eaten Up By Big Banks

Discussion in 'Politics' started by pspr, Feb 25, 2013.

  1. pspr


    On television, in interviews and in meetings with investors, executives of the biggest U.S. banks -- notably JPMorgan Chase & Co. Chief Executive Jamie Dimon -- make the case that size is a competitive advantage. It helps them lower costs and vie for customers on an international scale. Limiting it, they warn, would impair profitability and weaken the country’s position in global finance.

    So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?

    Granted, it’s a hard concept to swallow. It’s also crucial to understanding why the big banks present such a threat to the global economy.

    Let’s start with a bit of background. Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.

    Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers -- Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz -- put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.

    Big Difference

    Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.

    The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.

    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.

    Regulators can change the game by paring down the subsidy. One option is to make banks fund their activities with more equity from shareholders, a measure that would make them less likely to need bailouts (we recommend $1 of equity for each $5 of assets, far more than the 1-to-33 ratio that new global rules require). Another idea is to shock creditors out of complacency by making some of them take losses when banks run into trouble. A third is to prevent banks from using the subsidy to finance speculative trading, the aim of the Volcker rule in the U.S. and financial ring-fencing in the U.K.

    Once shareholders fully recognized how poorly the biggest banks perform without government support, they would be motivated to demand better. This could entail anything from cutting pay packages to breaking down financial juggernauts into more manageable units. The market discipline might not please executives, but it would certainly be an improvement over paying banks to put us in danger.

    To contact the Bloomberg View editorial board:
  2. TGregg


    <img src=>
  3. pspr


    That really puts the problem in perspective.
  4. That picture of the pie is racist. I can't quite figure out how just yet, but I know that it is because it's critical of Obama, however indirectly. I will conference call with Mr. Tingle down my leg, Carpet Munching Maddow, and Mr. not so SHARP-ton for specifics on the racial element of the pie.
  5. pspr


    It looks too much like watermelon?
  6. Odumbo has plans to DESTROY AMERICA. I believe he plans to do so by swamping us with massive deficits and debt such that our financial system collapses... followed by a "new order"... likely some type of dictatorial rule.... where there will be no rich... just equally miserably poor.

    Hopefully, people will wake up in time to thwart his objectives.

    :mad: :mad:
  7. Apparently the entire amount of the sequester is spent feeding hungry children who will starve horrribly if the money is cut off. Sorry, no other options, they will just die and it will be the republicans' fault.
  8. Apparently so. Seems the government can't handle what they expect every working American to deal with. Every single working person saw a 2% pay reduction last month. Now we can argue whether or not that 2% should have ever been discounted from social security in the first place, but that ain't the point. If every American is being told, tough luck, the money is gone, deal with it. Well, what's good for the goose...