Banks to Have Fed Dividends Clipped to Pay to Fill Potholes; JPMorgan, Bank of America the Biggest Losers

Yesterday, the general public scored a small but important victory over the Fed and the banking-industrial complex. To help fund the highway trust, which repairs highways and bridges, Congress released a compromise to the highway funding bill that whacks a long-standing subsidy to banks. This measure has high odds of passing.

Part of the funding will come from a cut the dividend the Fed pays to member banks on their non-voting preferred stock holdings. It will drop from 6% to the 10 Treasury bond yield at the time of the dividend payment, which currently is 2.3%, with a cap at 6% for banks with more than $10 billion in assets. This was a compromise from the original proposal, to cut the dividend to 1.5% for banks with over $1 billion in assets.

The banks that will see the biggest decline in income in 2016 as a result of this change will be JP Morgan and Bank of America, at roughly $200 million each. Media reports suggest that this change will produce $8 to $9 billion in revenue, but the experts to whom I’ve spoken estimate the take at $12 to $15 billion over the next ten years.

While this is not the most earthshaking change, it is nevertheless important for several reason. First, it is a sign of the decline in reputation and power of the Fed as well as of the banking lobby. This provision was included in the highway funding bill, which was where it was first proposed in its current form (the idea had initially surfaced as an idea in the Progressive Caucus’s budget proposal). It had been removed from the House version of the bill but was reinserted in the reconciliation talks.

Notice that the measure went forward despite the shameful but predictable opposition of Janet Yellen, who blathered about “unintended conquences”. The more likely path for this to have gone on was for the Fed to have won this round, but for the idea to have gone on the list of earmarks and to have eventually been passed, since legislators who don’t understand how MMT works are always in need of ways to fund their spending bills.

Second, the passage of this provision implicitly recognizes that subsides to banks are unnecessary and don’t deserve to be preserved.

More from Dave Dayen at the Intercept, who first wrote about this bank handout in 2014:

Fed membership offers many perks, from access to processing payments to cheap borrowing. But the dividend could be the sweetest gift, because banks cannot ever lose money on the stock; they’re even paid out if their regional Fed bank disbands.

Despite the total lack of risk, member banks have received the 6 percent dividend payout every year since 1913.

So for example, JPMorgan Chase, which has held stock since then, has made back their investment six times over without risking any loss. And if the bank stock was in place before 1942, that dividend payment is tax-free.

Originally – that is, 100 years ago — the Fed offered the dividend to entice banks into the new Federal Reserve system. But nationally chartered banks are today required by law to become members, and all banks must abide by the standards of membership. So the dividend is just a vestigial sweetener that never went away, pumping billions of dollars in public money to the banks for no discernible reason.

For once, sanity reigns. Who’ve have thunk it?

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  1. Larry

    I never would have believed it could happen, though I guess it’s not official yet. Given how weak our DoJ enforcement of financial crime is, this seems like small potatoes that can easily be ignored.

  2. Deloss Brown

    This is great news to wake up to, and I thank you.

    But won’t there be screams and howls of rage at this socialistic, destructive, job-killing change?

  3. Samuel Conner

    It occurs to the small corner of my mind that still retains some optimism that this might help to justify, by reducing to virtually nil the net cost to Treasury, Fed monetization of Treasury-issued consols. I wonder what Sanders’ view on the subject is.

  4. Vatch

    Wow. Less than a month ago, the House voted to preserve the banks’ 6 percent dividend. This was discussed at NC:

    Is it possible that our letters to our Representatives actually made a difference? I won’t hold my breath, but it is promising. So far, there’s no information at the Congressional web site about this action on H.R. 22. Here’s the link, which may have data in it later this week:

  5. Keith

    Familiarize yourself with the mechanisms by which the banks take a cut at every stage in the current monetary system.

    Hidden Secrets of Money – Video 4

    Then realize how every social system since the dawn of civilization has been constructed to support a Leisure Class at the top.

    (The Theory of the Leisure Class: An Economic Study of Institutions, by Thorstein Veblen. It was written a long time ago but much of it is as true today as it was then. The Wikipedia entry gives a good insight.)

    The Leisure Class is better hidden now in the US but was very obvious at the start of the 20th Century. In the UK we still have an upper leisure class, we call them the aristocracy.

    The UK’s aristocracy has seen social systems come and go, but they all provide a life of luxury and leisure and with someone else doing all the work.

    Feudalism – exploit the masses through land ownership
    Capitalism – exploit the masses through wealth (Capital)

    No system has ever been designed to trickledown, they are all designed to benefit those that construct it and put it in place.

    Within Capitalism the parasitic, rentier trickle up is achieved as follows:

    a) Those with excess capital invest it and collect interest, dividends and rent.
    b) Those with insufficient capital borrow money and pay interest and rent.

    As society moves on, the mechanisms by which the system takes do become more sophisticated and they are designed that way.

    The Rothschild brothers of London writing to associates in New York, 1863:

    “The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”

    1. Keith

      Today’s ideal is unregulated, trickledown Capitalism.

      We had unregulated, trickledown Capitalism in the UK in the 19th Century.

      We know what it looks like.

      1) Those at the top were very wealthy
      2) Those lower down lived in grinding poverty, paid just enough to keep them alive to work with as little time off as possible.
      3) Slavery
      4) Child Labour

      Immense wealth at the top with nothing trickling down, just like today.

      The beginnings of regulation to deal with the wealthy UK businessman seeking to maximise profit, the abolition of slavery and child labour.

      Today’s ideal of unregulated, trickledown Capitalism is a driver of inequality.

  6. Lune

    This is a small, but good piece of news (assuming it passes, which it likely will since it’s past the reconciliation phase, and even tea partiers like highway money).

    However, I’m curious whether Yellen will move to offset this subsidy to the banks by increasing the interest currently paid to banks for reserves held at the Fed? That is actually the more appalling subsidy: not only is it essentially giving free money to banks, but it’s totally counterproductive to the purpose of getting banks to lend.

  7. kevinearick

    Tesla’s War

    The reason the discussion keeps coming back to Tesla is because that is where development was shorted, back into the JPM/Edison/Roosevelt paradigm, and the empire’s exit strategy is to roll out what it understands of Tesla’s work, which isn’t much, as weapons, with the latest and greatest Star Wars Initiative. The Chicago Fair, 3-6-9, was just the tip of the iceberg. There are many problems with this exit strategy, not the least of which is that not everyone was wasting their time as Tesla did, trying to convince the majority not to kill themselves.

    Tesla wanted to give the world free energy, to make a point, and JPM was having none of it, surprise. The old man warned him. The problem-solution of globalization is that there is no exit for the bank, and the middle class, bred on money, needs a feedback signal.

    The vast majority of Americans have no experience with war, other than the nonsense presented by media, and those who do were merely pawns. As you can see, the dominant themes are denial, anger and depression, and the real action hasn’t yet begun. Keep your head while others are losing theirs.

    Who is in charge – you, your brain/groupthink, or your body/circumstances?

    A mighty river and all of the living beings in it are subject to gravity. Physically and intellectually you have no chance of conquering the river over time. The critters build their own prison cells with expedient assumptions and blame each other for outcomes, for no other benefit than relative position, in a prison. Don’t go in there expecting anything else.

    Do you really want to be Zuckerberg, Buffet or Hillary?

    They are not all scrambling for and failing to find an exit by accident. Nor is Sweden imploding by accident. And Draghi is a maniac.

    Among the moneychangers, Putin is in the best position, but that isn’t saying much; the only people the moneychangers hate more than each other is everyone else. Yesterday’s data, filtered by popular groupthink, is not the path to the future, except for the empire, replicating itself with derivatives. As Tesla liked to say, the present is theirs, but the future is yours, if you can think independently.

    (hint: it’s a resonant structure)

    Of all your schoolmates, how many ignored popularity, to escape their circumstances? Of those around you now, how many have a unique voice? What is unique about this website?

    Anyone can drop a piece of pavement across a gap. Knowing which gap to cross is a different problem all together. Don’t waste your time building or fighting over bridges to nowhere.

    If they are pushing asymmetric terrorism, what do you suppose their ‘solution’ is?

    Empires don’t run backwards by accident.

    1. Skippy

      “The vast majority of Americans have no experience with war”

      Au contraire…. Americans have been at war – with themselves – for some time now

      1. kevinearick

        Sorry, I wasn’t counting Larry, Moe and Curly…and spitballs.

        Americans will do the wrong thing every time…

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