Quantifying The Too Big To Fail Governmental Subsidy

Tyler Durden's picture

Even as Tim Geithner was boldly lying today on national TV, claiming that he abhors the concept of too big to fail, and condemns moral hazard, behind everybody's back he, together with the entire Obama administration, was trying to pass a law that would shift TBTF from a temporary program into officially canonized law. This is a scandal that has gotten little recognition in most of the MSM: in essence it guarantees that the massive mega banks like Goldman Sachs, BofA, and JPM will take on so much disproportionate risk the next time around (and with a moral-hazard encouraging Federal Reserve as risk regulator virtually guarantees their implosion) that not only will they blow up spectacularly once again, but that their bailout next time around will surely force America, already strapped with trillions of new upcoming debt courtesy of stimulus after stimulus, into sovereign insolvency.

One of the side effects of the TBTF policy is that it is essentially a subsidy of the mega banks at the expense of the smaller, regional ones, as the cost of capital of anyone perceived Too Big To Fail will approach zero due to their implicit guarantee by the US government in perpetuity: an unfortunate side effect of moral hazard becoming a national doctrine. An analysis by the Center For Economic and Policy Research has quantified the funding differential as one of 49 basis points, which translates into a bank subsidy of $34.1 billion per year for all banks with more than $100 billion in assets.

Comparing this thus quantified subsidy to other controversial programs as Foreign Aid Appropriations for 2009, indicates that the TBTF subsidy is 20% higher, and TBTF is more than double the projected budget allocated for the Temporary Assistance to Needy Families (TANF).

What is more relevant for shareholders of these banks, is that the subsidy, when represented as a fraction of bank profits, accounts for nearly 50% of all bank profits. And as profits are a function almost exclusively of banker comp as the only substantial banking overhead (consisting of base and bonus) the sad conclusion is that the government directly is funding at least half the bonus pool for all the TBTF institutions.

The table below highlights what portion of an institution's total profits is owed to Geithner's and Obama's generosity.

It is probably not too surprising that a high case estimate of the TBTF (which at the end of the day will likely prove too low anyway), accounts for 12.8% of profits at Goldman, 41.4% at JPM, 91.9% at Regions Financial, and a whopping 166.1% of Capital One's "profits."

As the CEPR paper authors Dean Baker and Travis McArthur point out:

[T]he recent rise in the profitability of the TBTF banks may be attributable to the fact that they enjoy the protection of the government’s backing at a time when the banking system as a whole continues to experience substantial strains. This should concern policymakers, since it would imply that a substantial portion of the profits of the largest banks is essentially a redistribution from taxpayers to the banks, rather than the outcome of market transactions. It is not clear that Congress and the public would support this redistribution if they realized that it was taking place.

So the next time there is public outcry at bonuses at Goldman Sachs, the general public should instead turn their anger to liars such as Tim Geithner who claim to want the right thing, but in actuality are merely trying to not only perpetuate the TBTF system and in doing so make it much more acute, but to also make sure that Wall Street extracts its pound of flash this bonus season, probably for the last time before the GDP collapse resumes its downward path absent Obama Stimuli 2 through infinity, and this time takes the market with it.

Full CEPR paper below: