Because of the way the US financial system is rigged structured, it’s in a bank’s best interest to get as large and unwieldy as possible because once a bank is “too big to fail” it’s also “too big to jail” its corporate officers. Viewed more simply, a Bloomberg editorial notes, the bigger the bank, the more likely it can rely on a government bailout if it drives its business into the ditch. Again. “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,” write the Bloomberg editors.
How big of a subsidy are we talking about?
Bloomberg cites the work of two researchers (.pdf; 1MB) — Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz — pegging the amount at 0.8 percent.
While that less than one percent number is indeed small, it’s impact is enormous. “Multiplied by the total liabilities of the 10 largest US banks by assets, it amounts to a taxpayer subsidy of US$83 billion a year,” according to the Bloomberg editors. “To put the figure in perspective, it’s tantamount to the government giving the banks about three cents of every tax dollar collected.”
The impact of the subsidy is so enormous, in fact, that it accounts for the entire annual profit of the five largest US banks: Bank of America, Citigroup, Goldman Sachs, JPMorgan, and Wells Fargo. The Bloomberg editors mince no words in their assessment: “In large part, the profits they report are essentially transfers from taxpayers to their shareholders.”
But wait, it gets even better. As Evan Soltas, writing for economics & thought points out, the US financial industry now accounts for “roughly half of all nonfarm corporate profits in the US, a share which has risen five-fold since the end of World War II.”
The Bloomberg editorial board identifies three simple, but effective, solutions:
- Require the subsidized banks to fund their
anticsactivities with shareholder equity, say US$1 of equity for each US$5 of assets (current banking rules are much more lax, requiring only a 1:33 equity ratio). - Require creditors to actually take losses for their bad bets when the banksters run their businesses into the ditch.
- Strictly enforce the Volker Rule, prohibiting the banksters from financing speculative
gamblingtrading.
On a related note, in recent testimony before the US Senate Judiciary Committee, US Attorney General Eric Holder acknowledged the big banks were too big to jail: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them. When we are hit with indications that if you do prosecute — if you do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy. I think that is a function of the fact that some of these institutions have become too large.”
Holder’s message was clear: He, as the US’s chief law enforcement officer, just wasn’t up to the task of taking on the banksters; they’re just too big and powerful.
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[Ed. note: Minor clarification changes have been made to this
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US taxpayers subsidize “too big to fail” banksters was originally published by ARTS & FARCES internet on Tuesday, 12 March 2013 at 7:57 AM CDT. Copyright © ARTS & FARCES LLC. All rights reserved. | ISSN: 1535-8119 | OCLC: 48219498 | Digital fingerprint: 974a89ee1284e6e92dd256bbfbef3751 (64.237.45.114)