Why Should Taxpayers Give Big Banks $83 Billion a Year?

[Acid Trip]

If you didn't like the big banks before you REALLY won't like them after reading this. Hopefully this will get some of you to close your major bank accounts and move to local banks or credit unions.

http://i.imgur.com/febg0ji.jpg

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.

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.

http://i.imgur.com/rL9MARU.jpg

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.

[Teh One Who Knocks]

I switched to a credit union a little over a week ago :dance:

[perrhaps]

I keep an account with Wells fargo only because i know I'll have ready access to funds in case of an emergency almost anywhere in the country. Other than that I put most of my cash in local banks years ago.

[Acid Trip]

I switched to a credit union a little over a week ago :dance:

:tup:


I keep an account with Wells fargo only because i know I'll have ready access to funds in case of an emergency almost anywhere in the country. Other than that I put most of my cash in local banks years ago.

:tup:

[RBP]

As I read this, the subsidy is in the form of a lower interest rate. That loss of revenue is a a little different than what would normally be considered a taxpayer subsidy but I get the point. I assume that the difference is compared to what smaller banks pay? I don't know that I understand why they get the lower rate, is it market driven or legislatively driven? Spending money on elections to "keep the subsidy" makes it sound legislative but the article doesn't reference any legislation?

I bank at a local bank... one branch. ;)

[perrhaps]

I keep an account with Wells Fargo only because i know I'll have ready access to funds in case of an emergency almost anywhere in the country. Other than that I put most of my cash in local banks years ago.

[Acid Trip]

As I read this, the subsidy is in the form of a lower interest rate. That loss of revenue is a a little different than what would normally be considered a taxpayer subsidy but I get the point. I assume that the difference is compared to what smaller banks pay? I don't know that I understand why they get the lower rate, is it market driven or legislatively driven? Spending money on elections to "keep the subsidy" makes it sound legislative but the article doesn't reference any legislation?

I bank at a local bank... one branch. ;)

You are correct, smaller bankers pay a higher rate.

The "reason" is that the big banks are so big that the lower rate lets them generate even more business thus "helping" the economy and the country. So the big banks get bigger and the small banks are at a competitive disadvantage.

I had to use quotes because it's all a bunch of horse shit if you ask me.

[RBP]

You are correct, smaller bankers pay a higher rate.

The "reason" is that the big banks are so big that the lower rate lets them generate even more business thus "helping" the economy and the country. So the big banks get bigger and the small banks are at a competitive disadvantage.

I had to use quotes because it's all a bunch of horse shit if you ask me.


Devil's advocate... how is this different than any other situation where interest rates are risk based? If the bigger banks are more safe (argument can be made I know) then they pay a lower rate. That's no different than countries or individuals that pay varying rates based on credit ratings.

[Muddy]

I switched to a credit union a little over a week ago

The feds are still going to send them your share of money though.

[Acid Trip]

Devil's advocate... how is this different than any other situation where interest rates are risk based? If the bigger banks are more safe (argument can be made I know) then they pay a lower rate. That's no different than countries or individuals that pay varying rates based on credit ratings.

Except the rates aren't set by by how well capitalized a bank is (well capitalized = low risk), they are set by how much they have in assets (sheer number of deposits, low capitalization or outstanding loans not withstanding).

Pretend the banks are people. Small banks have outstanding credit scores but not much by way of deposits. The big banks have shitty credit scores but tons and tons of deposits.

A small bank (credit score 800) has $50k in savings. They want to borrow $50k.

A large bank (credit score 500) has $1 million in savings. They want to borrow $1 million.

Who would you give the better loan rate to? The Fed prefers the large bank because the more they borrow the more money the Fed makes. The fact they aren't as able to pay it back (based on history) means nothing.

[RBP]

Except the rates aren't set by by how well capitalized a bank is (well capitalized = low risk), they are set by how much they have in assets (sheer number of deposits, low capitalization or outstanding loans not withstanding).

Pretend the banks are people. Small banks have outstanding credit scores but not much by way of deposits. The big banks have shitty credit scores but tons and tons of deposits.

A small bank (credit score 800) has $50k in savings. They want to borrow $50k.

A large bank (credit score 500) has $1 million in savings. They want to borrow $1 million.

Who would you give the better loan rate to? The Fed prefers the large bank because the more they borrow the more money the Fed makes. The fact they aren't as able to pay it back (based on history) means nothing.

So it's Fed policy, not a legislative issue? Why then do they say that they spend money on elections to keep the subsidy... because Fed policy is political?

[Acid Trip]

So it's Fed policy, not a legislative issue? Why then do they say that they spend money on elections to keep the subsidy... because Fed policy is political?

Correct except Fed policy and the legislative issue are one in the same! They feed off each other like parasites.

[FBD]

"Fed policy" is generally mandated by congress - but that's general policy, which translates to "we'll keep printing money until unemployment reaches 6.5%" since setting interest rates to workforce participation was dictated by (the big banks to) congress, giving anyone and everyone no culpability when the market doesnt respond to the employment rate.

At this point, all of this money printing is already priced into the market - when you announce QE fo-eva, the market takes that "free money" into account...and at this rate, most still playing the game are playing the bet that every month there's another 90 billion spent on keeping prices afloat. Aided and abetted by HFT high frequency trading to screw the individual over that extra little bit, because if you're trying to price an order and have an algo keep over or underbidding you on the microsecond level depending on which way the writer of the app wanted to artificially influence stock.

Its a MASSIVE fuckjob. The rent seeking pieces of shit that have a thousand times the influence they should are the reason redwoods fell in 2008 and were subsequently hauled back vertical, tied up with rope and duct tape, and declared protector of the forests once more.

Nothing has changed since 2008, except things have gotten worse and are more precariously perched.

(and of course dodd-frank made sure that TBTF became law, enshrining the illegal move they had already made by declaring it now legal, applicably retroactive.)

[RBP]

So what do you guys propose as a fix to these issues?

[Teh One Who Knocks]

So what do you guys propose as a fix to these issues?

http://i.imgur.com/9aXHXg1.jpg

[FBD]

You know me, I'm a bit...on the extreme side of this. I think the federal reserve needs to be declared the illegal entity that it is, have all of the fed's assets seized by the government for perpetrating a 100 year fraud on the american citizens, the money-watching aspects of it all be turned over to congress where the founders wrote in the responsibility. Let Ron Paul et al lead a charge for the establishment of a new standard, peg the dollar to gold, and yes, watch the shitstorm of revaluation come along.

NONE of this will be fixed until we start prosecuting the fkn fraud. Until we do so, keep your stock of popcorn.

[RBP]

You know me, I'm a bit...on the extreme side of this. I think the federal reserve needs to be declared the illegal entity that it is, have all of the fed's assets seized by the government for perpetrating a 100 year fraud on the american citizens, the money-watching aspects of it all be turned over to congress where the founders wrote in the responsibility. Let Ron Paul et al lead a charge for the establishment of a new standard, peg the dollar to gold, and yes, watch the shitstorm of revaluation come along.

NONE of this will be fixed until we start prosecuting the fkn fraud. Until we do so, keep your stock of popcorn.

Maybe we can start with a simple audit and so how that goes first. :lol:

[FBD]

:lol: yeah, like that's getting passed with dirty harry having a lock on what bills get brought to the senate floor

[FBD]

In case anyone was interested in what stock market activity looks like when an algorithm goes offline,

http://www.nanex.net/aqck2/4126.html
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/02/20130227_KCG_0.gif

[Lambchop]

When you guys decide to kill all of those gamblers in suits I'll be there to join you.

[Acid Trip]

In case anyone was interested in what stock market activity looks like when an algorithm goes offline,

http://www.nanex.net/aqck2/4126.html
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/02/20130227_KCG_0.gif

:lol: The market flat lined.

[Muddy]

So.. AT.. I have made a nice amount of money lately in my 401k becasue the stocks are riding super high.. How can I now move that money and keep it safe from the huge crash all the billionaires are seeing on the horizon?

[FBD]

:lol: purposefully, as part of a gold price manipulation move...look at the day leading up to it ;) algo had to be shut off so that those in the know could BTFD

[FBD]

So.. AT.. I have made a nice amount of money lately in my 401k becasue the stocks are riding super high.. How can I now move that money and keep it safe from the huge crash all the billionaires are seeing on the horizon?

pull every single bit of your 401 NOW and buy up gold and silver.

its a ballsy move and it will cost you in taxation,

but...

shit hits the fan and your wealth will increase very substantially instead of...well, think what naked pictures of bea arthur do to a stiffy, if you keep everything in the inflated 401 scam.

[Muddy]

Thank you, FBD. But really I cant take financial advice from a guy that lives in an apartment and works at Pizza hut online..

[Pony]

:rofl:

[PorkChopSandwiches]

:lol:

[Acid Trip]

So.. AT.. I have made a nice amount of money lately in my 401k becasue the stocks are riding super high.. How can I now move that money and keep it safe from the huge crash all the billionaires are seeing on the horizon?

You should start moving your money into safer assets as you get closer to retiring (or if you feel bad things are about to happen). Don't pull the money out or you'll take a huge tax hit!

1. Almost every 401k has something similar to a savings account. It's FDIC insured (to a certain amount) but makes pitiful returns. You'll know when you find it because it's the only one FDIC insured. Your money will be "safe" here but the returns are not enough to match inflation. This is not a long term solution.

2. Move from stocks to bonds. Bond funds are much safer than stocks but have lower returns. Pimco Total Return D is one I've had for a long time. Averages 5-8% returns and isn't as volatile as stocks. If you at least check the market on a daily basis you'll never lose enough in one or two days to really hurt you if you are heavily invested in bonds.

3. Income funds. These funds invest in safer bonds with lower returns. They make less than a regular bond fund (like Pimco Total Return D) but it's also safer. Used to generate income during retirement or can be used before as a way to get safer returns.

4. Lower your 401k contribution percentage. After you move into safer assets you could lower your 401k contribution. Lower it to you get the maximum company match but nothing more. Put the extra money in your check towards gold and silver.

5. Targeted retirement funds. You may have a few of these to choose from. A targeted fund automatically moves from stocks to safer investments as you get closer to retirement. If you think a crash is coming soon (and retirement is 10-20 years away) a targeted fund is a BAD idea.

Hope that helps. Your HR department should someone to help with your 401ks and making your investments safer.

[Acid Trip]

If you call HR and say "I want to re-balance my 401k account into safer investments" they should know exactly who to point you towards.

[RBP]

I was thinking about this small bank thing. I must be my local banks nightmare. I don't pay any fees of any kind, have no credit cards or loans, keep very little money in the bank, and use teller services like 5 times a month. The lose money on me for sure. I did change to electronic statements though, so at least I saved them that expense. :lol:

[DemonGeminiX]

:-k

I don't think I've ever had a bank account. I've always had the credit union accounts that I have.

[FBD]

Thank you, FBD. But really I cant take financial advice from a guy that lives in an apartment and works at Pizza hut online..

:lol: hahaha that was a good one man, I got a good chuckle outta that :tup:

like I said I'm a bit radical on these things, I completely stopped contributing to my 401 a while ago, and reallocated as much of it as I could without leaving my job.