Tuesday, March 5, 2013


Want to know how much banks would actually earn if they didn't have access to taxpayer subsidized bailout cash, credits, and other guarantees? According to Bloombeg News' editorial board they would earn virtually nothing, or they would be experiencing significant losses.

Check what happens to the profits of our country's largest banks without the bailout guarantees.

* JP Morgan Chase: Profits drop from $17.24 billion to just $72 million.
* Bank of America: Profits drop from $15.78 billion to a net loss of $82 m.
* Citigroup: $13.39 billion to a more than $4 billion loss.
* Wells Fargo: Losses go well over $8 billion. 

This chart provided by Bloomberg News should help you visualize the losses. For now, let's call it the chart of the year (decade?)  ...

Bloomberg's editorial board draws on information developed in a International Monetary Fund (IMF) study, "Quantifying Structural Subsidy Values for Systematically Important Financial Institutions." The study focuses on long term bond pricing (with and without bailout subsidies) and was put together by Keniche Ueda and Beatrice Weder di Mauro.

In a few words, they found that there is significant financial value to having the government back the financial sectors ineptitude (over and over again). Financial institutions that would normally go under keep their heads above water with taxpayer backed bailouts.

Specifically, because financial market players have come to accept that the U.S. government will bailout the largest banks in America these banks get to borrow at lower interest rates from financial markets. Without this financial prop the banks could not cover their current operating costs. Bank profits would effectively disappear (as would executive bonuses).

In practical terms it's the difference between having someone with good credit, or a parent in good financial standing, co-sign a loan for you. Not only is your interest rate much better, but in many cases you wouldn't be able to get the loan without the co-signer. So, yeah, the American taxpayer has become the co-signer for America's biggest banks. Without it they could be looking at bankruptcy.

So how much are we talking about for Americas biggest banks? About $83 billion a year, or about 3 cents of every tax dollar collected from you and me.

Pretty sweet, if you're a big bank.

- Mark 

1 comment:

R. M. said...

Did you watch the Daily Show last week and Jon's take on all the mergers going on? Their theory is they are purposely merging so they can be to big to fail. Personally, I don't doubt the idea.