Huge amount of tax money going to funding bank subsidy programs

Crossed fingers

A recent Bloomberg article called bank subsidy practices to question, as the nation’s biggest banks are getting some big breaks from the government. Photo Credit: discoodoni/Flickr.com/CC-BY

It would stand to reason that the largest companies in various industries, say banking, wouldn’t need taxpayer help at all. However, the opposite is apparently the case as a Bloomberg report recently found the bigger they are, the bigger the bank subsidy, on the taxpayer’s dime no less.

Bloomberg alleges banks make almost no profit without bank subsidy

A recent Bloomberg editorial raised the issue of bank subsidy funds, namely money banks get from the taxpayers. The subsidy, an implicit subsidy, is lower interest on federal funds; banks, you see, borrow short term loans from the Federal Reserve, the privately-owned federal agency and central bank, which they in turn lend out.

The subsidy is that some banks, the “too big to fail” ones, get favored nation status as a result of being big and get a reduced interest rate. A paper by the International Monetary Fund found a discount of 0.8 percentage points, or 0.8 percent.

Bloomberg calculated the discount added up to $83 billion per year the taxpayers were gifting the banking industry. The top five largest banks, Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Goldman Sachs, got $64 billion, about what those firms made in profits last year.

Land of confusion

In essence, the profits of the largest banks in the nation appear to have been transferred away from taxpayers – as it would normally be deposited in The Treasury, where Fed profits go – to shareholders.  Bloomerg’s estimates found only Wells Fargo turned a profit last year out of the top five largest banks without the bank subsidy.

Bloomberg was then inundated with gripes about how they arrived at those numbers. One could delve further into it, but as Bloomberg’s editors rebuttal to criticism points out, the total amount of subsidies to banks isn’t entirely known as the government doesn’t report it and by some metrics, the $83 billion might actually be conservative.

Government officials are, after all, well paid by banks, in guise of campaign donations, to be on their side.

Ultimately, what is known is that the banking industry, which really shouldn’t need the help, is getting sweetheart deals at cost to the taxpayers.

Too big to play by the rules

This isn’t new; during the peak of the financial crisis, according to a 2010 Daily Beast article, the Temporary Liquidity Guarantee Program lent large sums to banks to guarantee debt, for fractions of pennies. Goldman Sachs, for instance, had borrowed $21.3 billion for 0.767 percent APR, 540 basis points – one basis point is 0.0001 percent – lower than the private market, a huge discount as it saved Goldman $213 million per year in interest payments. Most of the banks borrowing TLGP funds had already paid off TARP obligations.

Neither is this uniquely American; the National Economic Foundation in the U.K., according to The Telegraph, in 2011, found similarly that the Bank of England was likewise lending funds at reduced rates to large banks. The discount was estimated to be worth 100 billion pounds (about $152 billion) in 2009. The Bank of England released a report last year finding the implicit subsidy was worth up to 220 billion pounds over 2009 and 2010.

Fed insiders, including Dallas Federal Reserve President Richard Fischer, according to Reuters, have acknowledged unfair advantages for “too big to fail” banks.

Sources

Bloomberg

Daily Beast

Bloomberg

The Telegraph: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9295880/Banks-received-implicit-taxpayer-subsidy-of-up-to-220bn-Bank-of-England-says.html

Reuters: http://www.reuters.com/article/2012/06/29/usa-fed-fisher-idUSL2E8HT04C20120629

The Telegraph: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8748225/UK-banks-handed-46bn-taxpayer-subsidy.html

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