Debunking the “Paid Back the TARP” Myth: Banks Should be Paying Over $300 Billion a Year in Systemic Risk Insurance

This Institute for New Economic Thinking interview with economist Ed Kane discusses how systemic risk should be measured. Kane argues that taxpayer are essentially disadvantaged bank shareholders, getting the downside and none of the bennies, like dividends or capital gains. He argues that banks should be paying taxpayers for the privilege of having them and their counterparties rescued, and that is over $300 billion a year.’

And that isn’t the only freebie banks are getting. For instance, the near zero interest rates are tantamount to a tax on savers (when per above, the banks should be making payments). Some have estimated the cost to savers is over $350 billion a year.

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  1. HarrisonBergeron

    Of all the memes that annoy me, “TARP was paid back” is by far my lest favorite. The whole pretense of the statement is usually at odds with the troglodytes who spew it. To wit; if the government is so incompetent, and “can’t even run a whorehouse” then how in god’s holy name did they turn a profit loaning money to the most tricky and wise minds in finance. It is a priori untrue and no especially the mental giant Erin Burnett even let this concept intrude into their version of reality.

  2. Middle Seaman

    Elizabeth Warren first politically stated the true ownership principle.

    There is nobody in this country who got rich on his own—nobody. You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces [sic] that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory—and hire someone to protect against this—because of the work the rest of us did.

    Add the banks who breath our hard earned $$$ and you understand modern American slavery.

    1. psychohistorian

      That modern American slavery is going to dovetail with the rest of the American imperialistic slavery that they have exported to the world under the guise of Freedom for the past 60 years.

      1. wunsacon

        Yes, I’m afraid it’s our turn for austerity and drones to watch over us, as we run out of foreign targets for the same.

    1. Yves Smith Post author

      First, not all financial firms are FDIC depositaries. Look at how we bailed out primary dealers, including folks like Soc Gen. They have US operations and benefit from cheap dollar funding. There is a big dollar market in the Eurozone, that’s why the Fed did currency swaps in the crisis (the ECB can create only euros, so we had to allow the ECB to swap euros into dollars to support eurodollar funding).

      Second, the banks have a lot of market funding via the repo market, That isn’t deposits.

      Third, they also benefit from securitization, like originating mortgages that they get guaranteed by Fannie and Freddie, and credit card and auto and student loan securitizataions. All of those benefit from the low interest rates and hurt savers.

    1. Yves Smith Post author

      The interview Ed Harrison posted is not as precise (I winced when Middleton said the government pressured BofA to buy Countrywide. Ken Lewis fell all over himself to get that deal done and paid a big premium. Ditto Merrill) but gets at the main issues on the CDS.

  3. Jim A

    Well they paid it back largely with money borrowed at subsidized interest from the Federal Reserve using ever dodgier colatteral. So at a very real level, the rest of us are still on the hook if they default. TARP is best regarded as a bridge loan until they could get money from the Fed.

  4. Greg R

    Recommend taking 10 minutes for this one. Because of TBTF “taxpayers are essentially implicit stockholders” of these institutions.

  5. rd

    While it is clear that FDIC only covers about half of the financial system, I think that a clearly scaled FDIC insurance charge with small banks paying slightly less than the actual cost of insurance because they do not have major systemic risk and the TBTF paying double the expected cost of insurance because of their massive systemic risk and other implicit guarantees in the system.

    The insurance cost should be calculated using the “outliers” like 1929-1933, the S&L crisis and 2008-2011 as the primary inputs since the main purpose of insurance is for the big, infrequent events instead of the typical day-to-day stuff.

  6. Hank

    This is just like the taxpayer sucker assumption
    of the systemic risk of nuclear meltdowns through
    the Price Anderson Act.

    Nuke operators like Pacific Gas and Electric are
    on the hook for a small payment of a couple billion
    should say, Diablo Canyon irradiate San Luis Obispo, the students at Cal Poly and the agricultural lands of the
    central California coast.

    Homeowners’ insurance? Forget it. There’s a radiation
    exclusion as boilerplate.

  7. fresno dan

    The problem with the analogy is that it makes the case that the banks are like homeowners who get their house rebuilt without paying their insurance premiums.
    It doesn’t go nearly far enough.
    Its like homeowners who are convicted arsonists and serial pyromanics who live in a desert with no firehouse within 100 miles in a straw house storing gasoline and shooting off fireworks every hour, who than have their house insured for 100x the value of the house. And accuse anyone with water of being a communist.
    Oh, and they run a puppy mill too.

    1. Blunt

      LMAO! OK, maybe it’s a bit overdrawn, but not a lot and the absolutely astonishing sense of scale in it makes it a very simple matter to overlook the fact that the banks have wooden houses rather than straw houses. Excellent!

  8. Gil Gamesh

    Accountants rule the world. Consider, what is revenue is pretty clear (sure, recognition, timing, etc.). Costs, however, are where profit is made. Capitalists ingeniously, through accountancy, are able to externalize most costs. The subsidies the people of the US provide to big banks is further evidence of Americans’ legendary generosity, The fact that managers can declare profits and grant bonuses (to themselves!)is further evidence of our great American Way (Void in Libya).

  9. JVDeLong

    Question: what is the source of the $350 billion estimate of the cost to savers of law interest rates?

  10. mindrayge

    Keep in mind that there was one other backdoor bailout to the smaller TARP banks. Last year the Small Business Lending Facility (?) the acronym is SBLF was enacted into law. This was the legislation that had the DC politicians and media proclaiming that the $30 billion provided in the law would turn into $300 billion in lending to small businesses.

    Part of that law creating the SBLF allowed TARP banks under $10 billion in assets to payoff their TARP loan by borrowing from the small business fund. At the end of May this year the first audit report was completed. As of that time 43% of the banks requesting money through this facility were TARP banks. The amount of money they requested was 65% of the total requested by all banks. As of the audit report there were close to 670 banks requesting $9.3 billion in funds. So nearly 290 smaller TARP banks requested nearly $6 billion in funds.

    The program closed at the end of June with a little over $12 billion in requests. How much of the additional monies were requested by TARP banks will have to wait until the next audit report.

    If you look at the daily TARP reports on the Treasury site you will see that $2.7 billion has already been used to pay down TARP obligations. The total amount will only be known over time as the process of approval and releasing of funds to requesting banks is apparently a drawn out process.

    This is part of the obfuscation and subterfuge by the government to claim TARP repayments while at the same time just offloading the same unpaid obligation into a different program.

  11. F. Graeber

    “For instance, the near zero interest rates are tantamount to a tax on savers (when per above, the banks should be making payments). Some have estimated the cost to savers is over $350 billion a year.”

    This is such a canard. Savers have no right to a given interest rate for their money. And at a time when investors are willing to lend money to the U.S. government for 10 years at less than 3%, it’s absurd to think that a saver who wants to be able to get his/her money back on demand would be getting more than, say, 1%. Low interest rates are not a tax on savers any more than low prices on products are a tax on the businesses that sell them.

    1. alex

      “Savers have no right to a given interest rate for their money.”

      Nor do banks (and “banks” like GS) have a right to borrow from the Fed at ZIRP rates. So since neither side has a “right”, the Fed has wisely decided to give the entire advantage to the banks.

      That’s not favoritism, right? I’m sure if I ask nicely Helicopter Ben will let me borrow a measly billion or two at ZIRP rates. Heck I’d be happy borrowing enough to pay off my mortgage. Not that my current 4% is so bad, but ZIRP sounds even better! And I can assure Mr. Bernanke that I’m a better credit risk than the Systematically Dangerous Institutions.

    2. Yves Smith Post author

      Are you for real?

      The Fed is clearly, by design and to help the banks, pushing interest rates in the money markets WELL below where they’d be set on an arms-length basis. The intent is to push everyone to take more risk.

      If you don’t want to take more risk, and a lot of people don’t or can’t, they are being screwed.

      1. F. Graeber

        “The Fed is clearly, by design and to help the banks, pushing interest rates in the money markets WELL below where they’d be set on an arms-length basis. The intent is to push everyone to take more risk.”

        Yes, I’m for real. And I’ll say it again: savers have no right to some given interest rate. It’s not the Fed alone that’s lending money to the federal government at less than 3% for 10 years. For that matter, banks are willing to lend money to homeowners at less than 4% for 15 years. If the 10-year rate is less than 3%, why in God’s name do you think that a completely risk-free loan that the lender can demand to be paid back at any time (that, after all, is exactly what a bank deposit is) should have an interest rate above 1%? If anything, that seems high to me. The idea that there is any “tax” involved here doesn’t even pass the laugh test.

        1. maynardGkeynes

          The entire yield curve has been suppressed by ZIRP. You can’t view the long rate in isolation as you are doing when there is open carry trade. The short time rate may be “fair” on a relative basis, but Bernanke has screwed with the basic term demand for money, which has definitely punished savers.

  12. craazyman

    I have a PhD in ExoBiological Astral Economics and fortunately spent 3 years studying a planetary civilzation that had a similar mishap.

    The moneylenders said that the population made money if you add up all the wealth created before the crash with the wealth saved by the bailout and you subtracted the implied contingent claim value. It resulted in 458 on the planet in question, which had 1.2 billion souls. That was at least a positive figure and showed the moneylenders had some concept of modesty, even though it was not employed in their usual activities.

    I found the logic to be spurious because you cannot value things that either never were real, or haven’t yet become real. You can only pretend. And everyone pretends differently, which is their God given right. Praise the Lord.

    I concluded that what really happened was Group Soul Theft (GST), which is a theft of soul creation potential through the dispossession of soul energy through financial fraud. This was hard to model mathematically, but I am amused by the kind souls who try. God bless them. They are mathematical gnostic saints even though they think they are professors.

  13. rotter

    It Should be called “Capitalism Insurance” and they used to pay it once upon a time, it was called “taxes”.

  14. Mcmike

    It is very much like having a ten year old child on a $13 trillion allowance, who buys you a christmas gift of a trinket from the dime store.

  15. Auntiegrav

    What are people FOR? What has ANYone done to deserve accumulation of any wealth? What are people doing for their own future? The future of their place, the planet?
    The concept of Rich vs. Poor is dandy, but it assumes that there are resources to back up the redistribution of wealth that shouldn’t have been imagined into existence in the first place. Wealth accumulation is really the denial of resources to others in some way or another. Comparing tax rates on people fails to understand the problem, which is one of money replacing value.
    Real value is determined by the usefulness of resources and people IN THE FUTURE. The only way for resources to make it into the future is to NOT USE THEM. That means that people have to find ways to service their own needs AND the needs of their place in the universe without consuming that place.
    Money detaches people from their place and from each other, allowing decisions to be made based only on arbitrary prices (not actual value to the future).

    Tax the money, not the people. All financial purchases and transactions should be taxed enough to establish sustainability. The “middle class” does not exist: there are those who have to work to eat and those who will never have to work again. Stop allowing the delusion of nobility and the delusion of “progress” based on money to keep you from actually thinking about where things come from and what people actually need.

  16. Spokaneman

    $350 Bn cost to savers rings pretty true to me. Having spent a 40 year career saving and inveting for my retirement, then finding that the best I can earn on my nest egg with any degree of safety is 2%/year is devestating. Historically, savers could earn 5% to 6% with FDIC insured CD’s. That “lost income” is being transferred to the Banks as surely as if there were a tax levied on savings.

    It’s the retired and the wannabe retired with any net worth that should be Occupying Wall Street

  17. RL

    Well … this is probably going to go on for another 40-50 years until AI/Robotics, in effect, make most work obsolete.

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