The Wrongologist

Geopolitics, Power and Political Economy

Banks: Are You Comfortable? Can We Get You Anything?

Wrong Today

Two facts in sublime

First, we continue
the stalemate over the Sequester. One side says “no new revenues” while the
other side says, “new revenues”.

Let’s start by discussing
the second fact: The FDIC reported that the banking industry had a great 2012.
The industry’s full-year earnings were the second-highest on record at $141.3
billion, an increase over 2011 of $22.9 billion, or 19.3%. This was the best result in 6 years, or since bank earnings
peaked in 2006 at $145.2 billion.

Much of the earnings
growth in 2012 came from banks reducing the amount they set aside in case of
losses on loans, the FDIC said. So, they didn’t have to write off as much in
bad loans as they did previously.

It was even better in the 4th
quarter of 2012: The industry’s earnings for the fourth quarter of 2012 totaled
$34.7 billion, up $9.3 billion, or 36.9% from the same period in 2011.

What’s Wrong

Big profits?? The
government has propped up the big banks for years through bailouts
and subsidies
After the earnings announcement, Bloomberg reported:

if we told you that, by our calculations, the largest US banks aren’t really profitable at all? What
if the billions of dollars they
allegedly earn for their shareholders were almost entirely a gift from US

And Bloomberg isn’t your usual source of radical

Lately, economists
have tried to pin down exactly how much the subsidy lowers big banks’ borrowing
costs. In one effort, two researchers — Kenichi Ueda of the
International Monetary Fund and Beatrice Weder di Mauro of the
University of Mainz — put the number at about 0.8 of a percentage point. The
discount applies to all their liabilities, including bonds and customer

Small as it might
sound, 0.8 percentage point makes a big difference: Multiplied by the total
liabilities of the 10 largest US banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s
tantamount to the government giving the banks about 3 cents of every tax dollar

The top five banks,
JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and
Goldman Sachs Group Inc. account for
$64 billion of the total subsidy, an amount roughly equal to their
typical annual profits. Check out Bloomberg’s chart below:

In other words, the biggest
and best banks in the US financial industry, with almost $9 trillion in assets,
equaling more than half the size of the US
, would just
about break even in the absence of corporate welfare. In large part, the profits they report are
essentially transfers from taxpayers to their shareholders.

it comes to big banks, we’re still doting parents: Four years after the financial
crisis, we just can’t stop babying them.

So, how
does all this fit with the Sequester

we can get back some of that subsidy by taxing the Banks.  Jesse Eisinger wrote at ProPublica  about establishing a transactions tax on the
banks.  He states:

month, Sen. Tom Harkin, Democrat of Iowa, and Rep. Peter DeFazio, Democrat of
Oregon, plan to reintroduce their bill calling for just such a tax.

A transaction tax
could raise a huge amount of money and cause less pain than many alternatives.
It could offset the need for cuts to the social safety net or tax increases
that damage consumer demand.

much could it raise

Harkin and DeFazio
got an estimate of $ 352 billion over 10 years from the bipartisan Joint
Committee on Taxation, which scores tax plans.

money would come from a tiny levy. The bill calls for a three-basis-point
charge on most trades. A basis point is one-hundredth of a percentage point. So
it amounts to 3 cents on every $100 traded.

The bill would exempt
initial public offerings (IPOs) so that the markets’ capital-raising function
isn’t harmed. Initial investments and withdrawals from tax-protected accounts,
like retirement or education funds, might also have some protection.

Critics say that it
will harm the capital markets and won’t raise that much money. They argue that
such a tax cannot be enforced; that it will depress trading, leading to lower
asset prices; and that it will ultimately be passed on to retail investors.

These arguments are dismissed
in an excellent report by Britain-based group, Stamp Out

Some taxes might be hard
to collect, but this shouldn’t be one of them. Trading is conducted by large
businesses on computers. This tax would be collected by the exchanges. And if no
stock exchange was involved, the buyer would owe it. It would be paid on any
trade carried out in the United States or by any American entity or individual
(a corporation’s offshore subsidiaries can’t get around it).

Trading has
skyrocketed in the last decade and a half. What has society gotten for it?
Bubbles, crashes, volatile asset prices and an outsize financial sector that
extracts rents from the rest of the economy. Rising transaction volumes haven’t
delivered broad-based wage growth or good jobs.

And it hasn’t really helped
the stock market. There has been no boom in IPO’s. The Dow and the S&P
index have just gotten back near to their peaks before the financial crisis.
The Nasdaq isn’t close to the peak achieved in the year 2000.

The average American, who has limited
exposure to the stock market, has little to fear from the tax and much to gain.
And if some of the high-frequency trading flees offshore? So be it.

The politics of a
transaction tax are daunting: Harkin can’t get this done by himself, so bank
transaction tax legislation will have to be embraced by some senators on the
relevant committees, like finance or banking. But Sen. Charles Schumer D-NY,
chair of The Senate Finance Committee, is a problem because his main
constituency is Wall Street.

There is a possible
anti-Wall Street/Big Bank coalition between Midwestern and Western Democrats
and Republicans. Sherrod Brown D-OH and David Bitter R-LA don’t agree on much,
but they co-sponsored a bill calling for more bank capital. Charles Grassley, R-IA
serves on the Senate Finance Committee and has been willing to challenge vested interests in the past.

But Republicans have taken blood oaths
never to support higher revenue.

If some kind of
increase in taxes is inevitable, one that takes aim at high-frequency traders surely
hits few Iowans (Mr. Grassley) or Americans in general, while it might do a lot
of good.

has to break the logjam between Republicans and Democrats.

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