
Why Should Taxpayers Give Big Banks $83 Billion a Year? - lisper
http://www.bloomberg.com/news/2013-02-20/why-should-taxpayers-give-big-banks-83-billion-a-year-.html
======
calhoun137
I love that we get these political discussions on hacker news, but I sometimes
wish we as a community would spend as much time thinking about politics as we
do thinking about programming and science.

Big banks function very much as part of the government, in many ways the big
banks determine government policy, certainly to a much greater extent than
popular opinion does. There are many forms of this public-private merging of
government. To take just one aspect, consider the revolving door whereby bank
executives go between their banks and government jobs and back again: to just
pick one example virtually at random, obamas chief of staff is a "former" citi
group executive. I wonder, if a bank executive goes to washington for a little
while, do they even notice that they changed jobs?

This article explains that the big banks wouldn't even be profitable without
massive tax payer support, here is a choice quote from the article which
really drives home how intense the stranglehold banks have over government
policy:

"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."

Some people wonder what could be done about such a situation. The sad truth is
that there are already an overwhelming number of ideas that are floating
around that have already been demonstrated to work (see iceland). The problem
is not coming up with a good idea, the problem is how to implement one of the
many good ideas which have already been proven to work.

The crux of the matter is that only the power of a strong federal government
can take on the even more powerful too big too fail banks. The only way
political change happens is when people get organized, and the american
political system gives us a lot of freedoms. If you live and a free country
and abstain from participating in politics, then in my opinion you have
abdicated your responsibility as a citizen.

~~~
shin_lao
You make a couple of great points, but you're obviously extremely misinformed
about Iceland. Basically what happened in Iceland is due to an amount of
stupidity that greatly exceeds the amount we're used to in the rest of Europe
and the USA (not implying that the people of Iceland are stupid, but they had
incredibly incompetent people at the helm). They bailed out their banks as
well, just wanted to make it look like they didn't.

 _"[there are ideas] floating around that have already been demonstrated to
work"_ is a bit of hyperbole and I'd love to see you get into the specifics.

The sad truth, to me, is that _we_ are responsible because we make our
governments spend too much money.

~~~
okamiueru
Iceland jailed bankers, and paid for the citizens' debt. I don't see why the
US can't jail people responsible for the crisis, even though the banks are too
big too fail. In other words, I don't see how banks are 'too big' to receive a
new CEO and lose a few employees.

~~~
damoncali
The vast majority of the people "responsible" were not doing anything wrong or
illegal. Who is responsible? Anyone who:

-Sold a house at an inflated price

-Bought a house at an inflated price

-Sold a mortgage to someone who could not afford it

-Bought a mortgage that they could not afford

-Sold MBS

-Bought MBS

-Used or provided leverage to buy MBS

-Insured these transactions with derivatives or other instruments

Who, precisely, would you like to arrest, and for what? This was not the
result of fraud (although I'm sure there was some of that) but the result of a
systematic setup for failure. Even if you cleaned up all of the fraud, it
still would have happened.

~~~
wnight
No, it was caused almost entirely by fraud. If not for people within 'the
banks' knowingly rating these mortgages as a ludicrously good buy, etc, there
wouldn't be a banking crisis.

There are even further systematic abuses that should see thousands jailed,
such as deceptive marketing and intentional misrepresentation of clients. None
of this would have been self-sustaining without all the coverups.

~~~
tsotha
>There are even further systematic abuses that should see thousands jailed,
such as deceptive marketing and intentional misrepresentation of clients.

I'm okay with that as long as all the homeowners who lied about their
financial situation go to jail as well. How many thousands of otherwise
ordinary people made false statements on loan applications?

~~~
wnight
Oh, so you aren't okay with charging a single uber-fraudster until all the
little guys are safely put away. That's handy.

While I agree that the little guys committed crimes too the bankers were ALSO
in a position of power AND have a duty to protect their clients AND engaged in
an on-going conspiracy to commit fraud. I'd be pissed if someone tried to
cheat me on EBay, I'd be livid if I discovered my banker had intentionally
been giving me bad advice because he profited on every dollar I lost.

The difference in scale between these things is so monumental that it makes
your comment seem absurd.

------
JamisonM
This analysis is a bit disingenuous, from the article: "The larger they are..
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."

As an implicit subsidy it is not as if there the 83 billion dollars that can
be "taken away" from the banks and used for other purposes. The implicit
government guarantee has value but if you can not find a way to recover that
value in some other way when taking it away from the banks you would just be
robbing the economy of that growth.

That being said it seems like the way to remedy this would be to use a tax
mechanism that can measure this subsidy and extract it from the banks in a
manner that is fair to bank investors and citizens.

~~~
eek04
Presuming that the theory is correct, there seems to be two sides to this:

First, you're going to be transferring that money to the banks/institutions
that lend to them. So the money isn't going away, it's just ending up as
profit for somebody else (as compensation for them considering themselves to
be taking on more risk.)

Second, the taxpayers going to get rid of that amount of cost in the form of
risk; the averaged risk is paid by the taxpayers, it is just paid in bulk when
the banks are about to fail.

This assumes the calculations are all correct, and it doesn't count in what
indirect cost the economy would have from loans getting a bit more expensive
overall.

~~~
damoncali
This is the part that gets me, as I've been saying this for a while -

 _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._

Makes one side seem a little less important to me.

~~~
snambi
Well, it is certainly possible.

It can go from "too big to fail" to "too big to rescue".

When that happens these banks, it would be disaster for many countries, not
just companies.

------
rayiner
Very interesting article, and it should be noted that while it's in the
opinions section, it is an editorial by the editors. See:
[http://www.bloomberg.com/news/2011-04-29/bloomberg-view-
to-b...](http://www.bloomberg.com/news/2011-04-29/bloomberg-view-to-begin-
publishing-editorials-in-late-may.html)

It's not some random HuffPo piece...

That said, the "profitability" of the big banks is somewhat irrelevant. JP
Morgan, Goldman, etc, evolved out of partnerships, where all the profits went
to the partners. To this day, the banks pay out most of their revenues as
compensation. "Profits" are what's left after all that.

~~~
nitid_name
>That said, the "profitability" of the big banks is somewhat irrelevant. JP
Morgan, Goldman, etc, evolved out of partnerships, where all the profits went
to the partners. To this day, the banks pay out most of their revenues as
compensation. "Profits" are what's left after all that.

Couldn't the argument be easily changed to "Big bank executive compensation is
subsidized by taxpayers"?

------
maceo
"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."

That's a brilliant observation. Props to Bloomberg for this incredibly lucid
op-ed.

------
ajtaylor
I feel it's a little disingenuous to call it a "subsidy" since the taxpayers
aren't actually writing the banks a check for $83 billion. But the key point
is still spot on: without the implied backstop of a government bailout the
banks would pay what everyone else must pay to borrow money, etc.

Too big to fail is simply a euphemism these days for "The government will take
care of everything no matter now stupid and reckless we act." This attitude
really must go. How should that be accomplished? I don't know. One thing is
for certain: the banks will drag their heels kicking and screaming should
someone try to change the status quo. And they'll probably get their way - but
it should still be attempted.

~~~
rorrr
"Too big to fail" means "they are our buddies and give us money and we won't
prosecute them".

~~~
ajtaylor
Sad, but so, so, SO true!

------
digitalengineer
I think Elisabeth Warren said it best when she asked "The Most Obvious
Question Ever And Stumps A Bunch Of Bank Regulators" She asks federal bank
regulators _why no banks were taken to trial_ in the aftermath of the
financial crisis.
[http://www.youtube.com/watch?feature=player_embedded&v=m...](http://www.youtube.com/watch?feature=player_embedded&v=mavB1lbtIow)

------
DamnYuppie
We will be better served as a nation with smaller banks, we need to get over
the concept of to big to fail.

------
redblacktree
I think we need to drop the concept of "too big to fail." If another large
bank requires a bailout, let's give it to them, but make a Ma Bell-style
breakup part of the deal. i.e. You get the bailout, but you can no longer be
too big to fail.

~~~
tsotha
Why wait? Instead of the consolidation we've seen, what we should have done is
increased reserve requirements and broken up the banks so they all had assets
below a certain dollar figure. On top of that, they should be forbidden from
owning securities related to other banks or insurance companies.

------
b1daly
In some sense the thesis of the article makes intuitive sense. How can the
banking sector really have much of a margin since they are dealing with the
ultimate commodity product, money!

Trading is a zero sum game, all the banks can't make a profit doing it.

Banks provide quasi governmental services to society, so one could make an
argument that they should be subsided in some way, or that they have to be
subsided! Their role in the economy is too fundamental to not have.

I've come across arguments that banks should just be turned in to utilities.

[http://www.nakedcapitalism.com/2011/08/should-banks-be-
publi...](http://www.nakedcapitalism.com/2011/08/should-banks-be-public-
utilities.html)

~~~
Aloisius
Wait, what? Trading is not a zero sum game except for maybe options and
futures contracts.

~~~
b1daly
Well, buying and selling financial instruments with short holding times is a
zero sum game. Any gain is created by another traders loss.

~~~
Aloisius
Yes, but banks more often hold large positions for long periods of time. While
they do engage in HFT, it is hardly their only trading strategy.

------
alan_cx
Any one know how much it would cost to let a failing bank go down, but
compensate the people with their money in that banks?

I never found out why we couldn't let that happen. If a bank fails, and I have
$10,000 in it, give me the money, not the failed bank. Then I can pick a new
back, which should in theory be stronger with the new influx of customers form
the now dead bank.

Besides, what happened to capitalism and competition? We capitalists seem to
ditch those principles the second it goes wrong, expecting socialist payouts
from the people to bail them out. No, businesses go bust, that is the whole
point. Survival of the fittest. Strength through competition. That is the
American way, no?

Worse still, was the bail out of the car industry. How did that happen? A
whole load of new companies killed off right there. People would have left,
some would start new firms, some would got an bolster existing firms, and so
on. Now, the same stagnation remains because it was propped up.

Ah, pah. Just another one of those things that leaves me depressed, confused,
and cold.

~~~
znowi
> I never found out why we couldn't let that happen.

Because they frightened everyone with an _imminent apocalypses_ if we were not
to save their fraudulent asses.

I believe we should have let them fail. It would not be pretty, but we'd
manage. Long term benefits would surpass temporarily hardship. First it would
cleanse the system and second set a strong precedent.

Besides, it would be very much in terms with capitalism - failed in
competition goes under. Yet funny how the banks that lobby for ever more
independence, rely so heavily on social welfare from the government :)

------
gruseom
The article says that without subsidies the big banks would about break even.
Does that presuppose that toxic assets are recorded accurately in their books?
I recall that there was controversy about this, and then the issue seemed to
vanish. If toxic assets have not been accounted for accurately, how big is the
discrepancy?

~~~
tsotha
"Toxic" assets don't necessarily remain toxic. In the last few years the
housing market has recovered somewhat, making the problem less urgent.

~~~
droithomme
That statement is disingenuous. Collateral based bad mortgages were a small
fraction of the toxic assets. Banks only ended up forgiving around $20 billion
in mortgage debt, which is nothing compare to the size of other issues. The
bad mortgage issue has been a red herring from the beginning to distract
attention from criminal fraud by bankers and absurdly focus on homeowners
instead.

Almost all of the toxic assets, or more properly, speculative loss that will
never be paid, was on the derivatives market which could be as much as $1.2
quadrillion dollars, 20 times the size of the entire world economy, of which
even the $16 trillion in bailouts was a small amount.

The toxic assets have been moving around and ending up off of bank sheets and
on federal government sheets as part of loan paybacks, which is more of the
massive scam and stealth bailouts going on.

Every one of these mega banks should be dismantled. The same scams continue.

~~~
tsotha
>Almost all of the toxic assets, or more properly, speculative loss that will
never be paid, was on the derivatives market which could be as much as $1.2
quadrillion dollars, 20 times the size of the entire world economy, of which
even the $16 trillion in bailouts was a small amount.

This is quite literally unbelievable. Do you have anything to back it up?

~~~
btilly
I suspect that [http://www.washingtonsblog.com/2012/05/top-derivatives-
exper...](http://www.washingtonsblog.com/2012/05/top-derivatives-expert-
finally-gives-a-credible-estimate-of-the-size-of-the-global-derivatives-
market.html) or something like it is the source.

In theory these unwind cleanly, and the actual risk is low. As the article
says, if there is even a small discrepancy in how they unwind, the real
numbers are insane. A big part of the freak out when Lehman failed is that
everyone knew that in theory the deals would unwind, but it had never been
tested in practice on anything like that scale.

~~~
tsotha
I've never read anything I thought was credible from washingtonsblog, and this
is no exception. The number is based largely on speculation, and if you follow
the chain of blogs and investor articles the whole thing just stinks of the
sort of hype you see when an investment site is trying to scare you.

------
chubbard
So I thought this article was pretty opaque. They didn't really discuss the
subsidy enough. They just said there was a subsidy that allowed the banks to
borrow money at a reduced rate. Who is giving them this preferential
treatment? How do those particular banks get that subsidy? Why not charge all
banks the same rate and let the size of these banks eat themselves. It's not a
hard concept to swallow if you've had economics 101. Law of diminishing
returns which happens to any business when it gets too large. But, I think it
didn't really layout a case for why this subsidy exists.

~~~
drucken
The basis of this article is a May 2012 IMF Working Paper called _"Quantifying
Structural Subsidy Values for Systematically Important Financial
Institutions"_ (<http://www.imf.org/external/pubs/ft/wp/2012/wp12128.pdf>).

The subsidy discussed is not an issue of economics directly, but capital
markets, i.e. finance.

The paper infers a subsidy level for state-supported financial institutions by
comparing the level of state support embedded in credit agency ratings and
comparing them to their long-run average value. The authors control for the
factors such as the sovereign's own ability to support, because sovereign debt
is also rated by agencies, and for institutions intrinsic rating values.

Credit ratings are used directly and indirectly by capital market participants
to determine the level of funding costs across all debt markets. So, they are
the best available proxy for determining at least a floor for this
preferential rate. As can be seen from previous financial crises, actual
bailouts would be highly dependent on the nature of crises and may be
substantially higher than expected.

 _How do those particular banks get that subsidy?_

\- from other market participants. In a sense, governments are permitting the
misallocation of capital from other market participants, including governments
and government agencies (hence taxpayers are directly involved), into the
state-supported institutions. It is not a zero-sum game because of how that
capital is then used.

 _Why not charge all banks the same rate and let the size of these banks eat
themselves._

\- there is no central rate allocation. Market participants use market prices
and their best available information for funding costs. A state-supported
institution is naturally considered by many participants to be a lower risk
than a non-state supported institution.

~~~
chubbard
I get the feeling the author of that piece didn't quite understand what the
"subsidy" represented, hence why the author didn't explain it very well. If I
can sum up what you said these bigger banks get better credit ratings because
rating agencies give them better ratings because of their size and perceived
safety. Overtime these small changes give them an edge in lending rates.

------
drucken
... Because it is in the best (short and mid-term) interests of a debt-laden
and debt-fuelled state to support those entities which can maximize further
debt creation.

Banks do not exist in isolation. You could go as far as to say the problem is
not so much Too Big to Fail, though that produces its own problems, as Too
Interconnected to Fail. These issues have only become worse since 2008.

~~~
rayiner
> ... Because it is in the best interests of a debt-laden and debt-fuelled
> state to support those entities which can maximize further debt creation.

How exactly?

~~~
damoncali
I think he's saying we need cheap capital right about now, and this quasi-
government lending machine is just about the only practical way to do that.
But it's not a forever thing, and it's going to break again.

Or as a character in _Margin Call_ put it:

"If you really want to do this with your life you have to believe that you’re
necessary. And you are. People want to live like this in their cars and their
big fucking houses that they can’t even pay for? Then you’re necessary. The
only reason they all get to continue living like kings is because we’ve got
our fingers on the scales in their favor. I take my hand off and the whole
world gets really fucking fair really fucking quickly and nobody actually
wants that. They say they do but they don’t. They want what we have to give
them, but they also want to play innocent and pretend they have no idea where
it came from. That’s more hypocrisy than I’m willing to swallow. Fuck them.
Fuck normal people."

------
Zuider
Hey! Who are you calling 'too big to fail'? I think they are failing just
fine, epic even, thank you very much.

------
unabridged
citizens should get the money directly. why should a private bank be able to
borrow at x% and sell the money to me at x+4%? if you are going to have the
fed system the government should loan out mortgages directly at the same rate
plus a fixed fee for a government approved appraiser.

------
dschiptsov
Because being successful cheater is better evolution strategy than being a
drone.

------
chrismealy
We already let banks print money. What's another $83 billion?

~~~
Aloisius
Doesn't the Bureau of Engraving and Printing (part of the Treasury) print
money?

~~~
jakerocheleau
I have seen this argument countless times but the BEP just gives money to the
Fed. It's pathetic. From Wikipedia:

> The Bureau of Engraving and Printing (BEP) is a government agency within the
> United States Department of the Treasury that designs and produces a variety
> of security products for the United States government, most notable of which
> is paper currency for the Federal Reserve.[1]

[1]
[http://en.wikipedia.org/wiki/Bureau_of_Engraving_and_Printin...](http://en.wikipedia.org/wiki/Bureau_of_Engraving_and_Printing)

~~~
Aloisius
None of the banks talked about in this article can make money. Only the
Federal Reserve Banks can. Equating one of the non-profit, tax-exempt Federal
Reserve banks which are controlled by the Federal Government, but "owned" by
member banks with a consumer finance bank is ridiculous.

Heck this article is talking about subsidized bank borrowing costs. The
Federal Reserve Banks have zero borrowing costs!

------
coditor
... and us nothing?

------
OGinparadise
_The banks that are potentially the most dangerous can borrow at lower rates,
because creditors perceive them as too big to fail._

Great, so we all should go to borrow from huge banks, no doubt their lower
rates are passed to the consumers, with the banks being caring and all.

~~~
samstave
People need to refuse to pay their taxes until .gov does something about the
bank fraud and criminality.

~~~
aangjie
Reminds of this. <https://en.wikipedia.org/wiki/Civil_disobedience> Though the
context doesn't fit exactly. and is a weak point for the analogy, but still
the idea is interesting.

