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Wall St ‘Too Big to Fail’ Subsidy: You Pay, They Play

Posted by Larry Doyle on March 27, 2014 9:19 AM |

In the midst of your morning routine, you can probably lay out a number of situations in which you reach into your pocket to pay people or vendors for services/products provided. I would imagine that many reading this blog pay for a daily coffee and newspaper, perhaps a periodic shoe shine, a highway toll, or train and bus fare.

In addition to these fees, how do you feel about reaching into your pocket on a daily basis to pay a surcharge to support banking institutions on Wall Street that are deemed ‘too big to fail?’ How does that feel? Not very good, does it? I did not think so.

Yet, make no mistake, that daily banking toll you pay, and the subsidy the banks receive, are very much a reality in America circa 2014.

A few years back, Bloomberg News had identified this banking subsidy as being worth $80+ billion dollars annually (that is 3 cents on every tax dollar collected!!) to Wall Street’s ‘too big to fail’ banks. Now, none other than the Federal Reserve Bank of New York provides further substance to this subsidy accruing to the largest banks in our land in a recently released report entitled, Special Issue: Large and Complex Banks; Evidence from The Bond Market on Banks’ “Too Big to Fail Subsidy.”  The author Joao Santos writes:

In my investigation, I focus on the primary bond market, but I take a different approach to the existing studies that have looked for evidence of a too-big-to-fail subsidy in bond spreads. I test whether investors perceive the largest banks to be too big to fail by investigating whether these banks benefit from a larger cost advantage (relative to their smaller peers) when compared to the similar cost advantage that the largest firms in other sectors of activity may also enjoy when they raise funding in the bond market.

I find that the top five banks by assets pay on average 41 basis points below the smaller banks’ bond spreads, after controlling for bond characteristics, including the credit rating, maturity and amount of issue, and the overall conditions in the economy at the time of issue.

While legislators and regulators may like to promote that Dodd-Frank has implemented charges and put mechanisms in place to deal with the possible unwind of these megabanks if they were to run into trouble, those costs are only further incentive for these very banks to get that much larger and take even greater risks so as to offset those costs.

Who is calling the shots here? The Federal Reserve? The Office of the Comptroller of the Currency? The SEC? Congress?

No, no, no, and most definitely, NO!!

Wall Street banks and their exceptionally powerful lobby ultimately carry the day, and they are collecting a toll from you, me, and every other taxpaying American on a daily basis.

Call it what you want: crony capitalism . . . corporate welfare . . . reality. Do not forget that the five largest banks (Citigroup, JP Morgan, Bank of America, Wells Fargo, and Goldman Sachs) hold 95% of the approximate quadrillion (that’s a thousand trillion folks!!) dollars worth of derivatives contracts. And we are supposed to believe that the Federal Reserve or some other entity might be able to manage an orderly unwind within that viper’s den?

What is the only way that this toll — er subsidy — might end so that we are never again faced with the need to bail out these institutions?

Break up these banks!

Navigate accordingly.

Larry Doyle

Please order a hard copy or Kindle version of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

For those reading this via a syndicated outlet or receiving it via e-mail or another delivery, please visit the blog to comment on this piece of ‘sense on cents.’

Please subscribe to all my work via e-mail.

The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Scannell

    And with our can’t do Congress, Wall Street keeps laughing all the way to their banks!

    • fairmead

      The only way you will achieve change is if you change you system for electing people. If you do not do so every elected official is either in debt to those who financed his/her election or sees him or herself as a beneficiary of the gravy train. Come on Larry tell how the electoral system will be changed so that Presidents and other elected officials, at all levels, are really free to exercise the mandate which they have been given without big business or Wall Street looking over their shoulder?






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