One of the key terms to come out of the nation’s economic meltdown has been “too big to fail.” The government has funneled billions of dollars to large financial firms by arguing that their collapse would deal an irreparable blow to economic recovery.
Well, a new study has calculated the tab of the “too big to fail” approach, and it amounts to a far larger taxpayer-funded subsidy than previously thought. The Center for Economic and Policy Research says the bailout has allowed “too big to fail” banks to pay significantly lower interest rates than those paid by smaller banks. According to one estimate, that’s meant a subsidy for the nation’s eighteen largest bank holding companies of $34.1 billion a year. That amount represents nearly half these companies’ combined annual profits.
The basic story is a very simple one. We got data from the Federal Deposit Insurance Corporation on the cost of funds, and they broke out the eighteen largest banks, the ones we looked at, all with assets of more than $100 billion, and compared their cost of funds with all the other banks in the system. And they found that, on average, their cost of funds is about eight-tenths of a percentage point less.
Now, it typically is somewhat less. In other words, the big banks typically pay somewhat less than smaller banks. So what we did was we simply looked at the difference in that difference. So, how much is that gap today, the last three quarters, when the post-Lehman, when we’ve in fact formalized this “too big to fail” policy, as opposed to what it had been in prior years? And we found there was a very substantial increase in that gap, about half a percentage point, and that comes out to about $34 billion a year in annual subsidies, as you had mentioned. So it’s a pretty sizable interest rate subsidy.
What is the cost of funds. This is the interest rate that banks pay to attract depositors?
If you or I go down and we deposit $5,000, $10,000, $20,000 in our bank, that’s insured by the FDIC, the federal government, so we could feel pretty safe on that. At least it’s as good as the government.
Now, if we had—let’s say we’re a big investor, we’re a mutual fund, whatever it might be, and we have $10 million to place somewhere. Well, if we go to a small bank, we’re worried. We have to look at them. Are they safe? Are they following good practices? They could go out of business; we would then lose that money. On the other hand, if we go to one of the big banks—a Citigroup, a Bank of America—and we put our $10 million there, we basically know at this point the government is going to come in and bail it out. So we look at that $10 million on deposit with Citigroup or Bank of America almost the same way as we would look as buying a government bond.
The banks that are profiting most from this taxpayer-funded subsidy.
The biggest banks profit the most. So if you look at Citigroup, Bank of America, Wells Fargo, JPMorgan, the bigger the bank, the more you profit. Now, how large is it relative their profits, you have some banks that it amounted the full amount or even more than their profits. Capital One actually the subsidy, by our calculation, was actually more than their profits. So it’s basically the story is, the bigger you are, the more money you pocket. How large that is relative to your profits depends on how profitable the bank would otherwise be.
There was a lot that underlie this, first and foremost, the housing bubble that reached $8 trillion. And we’re not about to reproduce that overnight. But we don’t have a situation in place that will prevent it. And at the very least what we’re having here is, in effect, a subsidy of the large banks at the expense of small banks or smaller banks. Many of the smaller banks are still quite large. But the point is that if you’re a Goldman Sachs, if you’re a Citigroup, you could borrow, and people are happy to lend you money, with the understanding that if things go bad, the government comes in and bails you out.
And Goldman is a great example here, because they’re basically doing exactly what they did before the crisis. That’s explicitly what Lloyd Blankfein, the CEO of Goldman, said. They’re operating the same way. They’re taking risky trades, in some ways more risky than they did previously. Thus far, they’ve paid off. And what that’s meant is they’ve paid big bonuses to—they’re paying big bonuses to their top people. They’re getting, it was, $9 billion in bonuses going to their top people this year. But, of course, if they make mistakes, well, we’re on the hook for those mistakes.
It’s Temporary Assistance for Needy Families. That’s the main welfare program that, people often talk about. That’s around $18 billion. So we’re talking about nearly twice as much going in subsidies to the “too big to fail” banks as go out in the main welfare program from the federal government each year. Foreign aid is around $25 billion. So, again, we’re now talking about somewhere around 30 percent more going to the biggest banks.
So we have a lot of people that will get very upset about money going to foreign aid, money going to needy families, thinking that that might not be a good expenditure, but the point here is we’re giving much more money to Goldman Sachs and Citigroup, Bank of America, than we are to foreign aid or to needy families.
Dean Baker talking:
Dean Baker, co-director of the Center for Economic and Policy Research. He is author of several books, his latest being Plunder and Blunder: The Rise and Fall of the Bubble Economy.
– from democracynow.org