A Bit More on the Bloomberg Piece

Separate notes on the Bloomberg piece we just discussed.

The piece is big on the six largest banks making a profit here.  But as I read their numbers:

The six — JPMorgan, Bank of America, Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and Morgan Stanley — accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and investment- services firms, the data show. By comparison, they had about half of the industry’s assets….The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show. The six biggest U.S. banks’ share of the estimated subsidy was $4.8 billion…

The six largest banks have 63% of the daily debt to the Fed but only 37% of the profit ($4.8 billion /$13 billion), profit estimated by Bloomberg’s metric of using net interest margin.  The implication being that the lion’s share of these bailout profits went to smaller firms than the top six.  The big six actually made relatively little of the profits given their size and exposure (am I reading this right?).  So we shouldn’t confuse these profits as being a result or a specific size of the largest firms but with the issues that come with lender of last resort in a financial crisis.  Even if the largest firms had non-deposit liabilities of less than 3% of GDP, these issues in a crisis would still be in play.

As Felix Salmon says, this is what a lender-of-last-resort looks like.  More transparency is an absolute necessary requirement for the Federal Reserve going forward.  Here’s a little bit about the battle over 13(3) emergency lending as they occured during the Dodd-Frank battles.

Let’s also mention what Dodd-Frank does here.  As the law firm Skadden notes, for emergency lending the Dodd-Frank Act requires that all collateral get a lendable value, that establishment of emergency lending programs or facilities would require prior approval of the Treasury Secretary and may not exist indefinitely….are terminated in a ‘timely and orderly fashion.'”

Any loan or financial assistance authorized under 13(3) would have to report the following to Congress: “justification for the exercise of authority; the identity of the recipient; the date, amount and form of the assistance; the material terms of the assistance” as well as written monthly updates on any outstanding loan or financial assistance.  These values that are provided to Congress are “subject to confidential treatment upon request of the Chairman of the Board of Governors.”  Perhaps removing that confidentiality with a time delay in the interest of transparency is a smart, bipartisan move.

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7 Responses to A Bit More on the Bloomberg Piece

  1. NKlein1553 says:

    Sorry to high jack the thread with a totally off-topic question, but I’m looking for a political cartoon I may have seen here at Rortybomb or perhaps it was at a website Mike linked to in one of his previous posts. The cartoon is a picture of a college administrator and his secretary. The secretary informs the administrator the federal government expanded a grant assistance program to students and the administrator responds “great, now we can raise tuition prices higher,” … or something to that effect. This would have been around the time JW Mason wrote a great piece entitled “Public Options: The General Case.” If anyone knows the cartoon I’m talking about, would they mind directing me toward a link? I’m a public high school economics teacher. I want to use that cartoon as part of a lesson I’m doing on elasticity of supply and demand. Thanks for the help.

  2. Pingback: interfluidity » Yes, Virginia. The banks really were bailed out.

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  4. Steve Roth says:

    $13 billion is a lot, but still less than 10% of annual profits, combined.

    Andrew Haldane of the Bank of England suggests that the implicit subsidy of TBTF guarantees could have been as much as $1 trillion.


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  6. Pingback: A Bailout is a Bailout is a Bailout | Clear Bourbon

  7. Pingback: Yes, Virginia, the banks really were bailed out. | The Big Picture

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