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?