6/19/2012 4:29 PM ET|
Jamie Dimon, welfare recipient
JPMorgan Chase receives billions in government subsidies each year. The money helps keep the bank afloat, at the risk of sinking the economy.
When JPMorgan Chase (JPM) CEO Jamie Dimon testified in the U.S. House today, he presented himself as a champion of free-market capitalism in opposition to an overweening government. His position would be more convincing if his bank weren't such a beneficiary of corporate welfare.
To be precise, JPMorgan receives a government subsidy worth about $14 billion a year, according to research published by the International Monetary Fund and our own analysis of bank balance sheets. The money helps the bank pay big salaries and bonuses. More important, it distorts markets, fueling crises such as the recent subprime-lending disaster and the sovereign-debt debacle that is now threatening to destroy the euro and sink the global economy.
How can all this be? Let's take it step by step.
In recent decades, governments and central banks around the world have developed a consistent pattern of behavior when trouble strikes banks that are large or interconnected enough to threaten the broader economy: They step in to ensure that all the bank's creditors, not just depositors, are paid in full. Although typically necessary to prevent permanent economic damage, such bailouts encourage a reckless confidence among creditors. They assume the government will always make them whole, so they become willing to lend at lower rates, particularly to systemically important banks.
With each new banking crisis, the value of the implicit subsidy grows. In a recent paper, two economists -- Kenichi Ueda of the IMF and Beatrice Weder Di Mauro of the University of Mainz -- estimated that as of 2009 the expectation of government support was shaving about 0.8 percentage points off large banks' borrowing costs. That's up from 0.6 percentage points in 2007, before the financial crisis prompted a global round of bank bailouts.
To estimate the dollar value of the subsidy in the U.S., we multiplied it by the debt and deposits of 18 of the country's largest banks, including JPMorgan, Bank of America (BAC) and Citigroup (C). The result: about $76 billion a year. The number is roughly equivalent to the banks' total profits over the past 12 months, or more than the federal government spends per year on education.
JPMorgan's share of the subsidy is $14 billion a year, or about 77% of its net income for the past four quarters. In other words, U.S. taxpayers helped foot the bill for the multibillion-dollar trading loss that is the focus of today's hearing. They've also provided more direct support: Dimon noted in a recent conference call that the Home Affordable Refinancing Program, which allows banks to generate income by modifying government-guaranteed mortgages, made a significant contribution to JPMorgan's earnings in the first three months of 2012.
Like all subsidies, the taxpayer largesse distorts supply. If the government supports corn farmers, you get too much corn. If the government subsidizes banks, you get too much credit. As of March, households, companies and government in the U.S. had amassed debts of $38.6 trillion, or 2.5 times the country's gross domestic product. That's up from 1.3 times in 1980. The picture is similar in the euro area, where debt outstanding is 1.8 times GDP, double the level of 1995.
The oversupply of credit -- also supported in the U.S. by government-backed lenders Fannie Mae and Freddie Mac, and by tax breaks on mortgage interest -- encourages risky behavior. People buy houses they can't afford, companies borrow too much for acquisitions, and banks employ excessive leverage to boost the returns they can offer their shareholders. The result is a bloated finance industry: As of 2011, the sector accounted for 8.3% of the U.S. economy, compared with 4.9% in 1980.
Inevitably, the debt burden becomes overwhelming, precipitating crises in which banks suffer losses, private credit dries up, and people cut back on spending to pay down their debts. The onus then shifts to central banks and governments as they engineer bailouts and boost their spending to prevent economic collapse -- a pattern that has repeated itself throughout the developed world, according to research by economists Carmen Reinhart and Kenneth Rogoff. This costly cycle has helped increase sovereign debts to the point where they now threaten the solvency of governments.
The solution: Minimize the subsidy. Require banks' shareholders to put up enough capital to make bailouts highly unlikely (we advocate 20% of assets). Allow some creditors to take losses when a bank gets into trouble, so they won't assume they're safe (an approach regulators in the U.S. and Europe are considering). Cut off subsidies to traders, such as the folks in London who lost billions for JPMorgan, by forbidding speculative trading activity at banks (the goal of the Volcker rule in the U.S. and financial ring-fencing in the U.K.).
Why hasn't this been done? One partial explanation can be found in the amount of money banks put into election campaigns and into lobbying, which has recently included efforts to water down the Dodd-Frank financial-reform legislation. According to the nonprofit Center for Responsive Politics, the broad financial industry -- a category that includes real estate companies and insurers -- has spent $285 million on political giving in the 2012 election cycle. That's much more than any other industry spends.
Lawmakers and regulators need to recognize just how costly business as usual will be. When Dimon pushes back against capital requirements or the Volcker rule, it's worth remembering that he's pushing for a form of corporate welfare that, left unchecked, could lead to a crisis too big for the government to contain.
More from Bloomberg.com:
VIDEO ON MSN MONEY
Few investigations into what and who caused the financial collapse? No prosecutions and no end to the looting? Tax payer money (TARP) handed to the looters who then pocketed it? The proceeds of the looting taxed at 15%? The looters standard of living continuing to soar while their victims continue hemorrhaging jobs and homes? SHARED sacrifice going forward??? It should have been: "we've been sacrificing for three years while the looters continued to prosper...NOW IT'S THEIR TURN!!!
TAX THE LOOTING RICH!!! No more discounts! Drop the deductions! Lose the loopholes! Shut the shelters! End the off-shoring! Close the Caymans! Sanction the Swiss (UBS & Credit Suisse)! ELIMINATE the cap on Social Security Tax! These out-sourcing Globalists do not need or deserve discounts!!!
Today we are dealing with the same type of fallout that preceded the Great Depression - wild bank speculation. History repeats itself.
Well, I guess some of those who wanted it repealed made out like bandits, didn't they? They take our banks deposits, use them for gambling, and then get more of our money when their bank is in trouble. Why do some people still defend these crooks?!
We need Campaign Finance Reform now. Time to end subsidies for big oil.
"So Everyone seems to have a gripe...unethical bankers, CEO's or our Misrepresentatives in office. When have we never had the power to boot the folks in Washington Out?"
That doesn't matter when it's the system that's broken. The system creates incentives for poor politicians. The political system is based on money and getting re-elected. Until there are something like term limits and the outlawing of Corporate Financing for political campaigns, you won't get action.
More political parties could be a good thing. Or maybe not if they just vote in line with Pubs and Dems. But regardless, unless the system gets changed, even a whole new group will not represent you. They will represent their campaign financiers.
Why is Dimon still employed at JP Morgan? Time to end Corporate Welfare now and forever. These jerks receive vast sums of money and yet they can't find any when it comes to extending unemployment benefits for the long term unemployed, people struggling to get by day to day, people in danger of losing their homes as the result of this depression! Something is radically wrong with this picture.
If a bank's purpose is to make money, why is he losing so much of it? Jamie should be fired (and tarred and feathered).
Can anyone imagine looking for a new job after his type of track record?
He's a cr00k.... Oh, sorry, I mean he's one of the top job creators.
That's true actually....he's helped many people get jobs in the foreclosure mills forging signatures. Whoops, I'm very sorry again, I forget many people don't like the truth.
So much for all the GOP 'job creator' BS. Time to rise up against all our taxpayer dollars going to support the lives of the rich and sleazy. Call your representatives and tell them to cut all these CEOs and their corps off from their subsidies to save us taxpayers billions.
Then tax these SOB CEOs so they are at least paying what the 99% are paying - start 'em all at a required 25% minimum tax. No more zero taxes paid by the CEOs and certainly no business should get away with zero taxes, much less year-end credits, for any subsidized 'big' businesses.
Spending cuts and revenue increases must start with these people instead of those on SS and Medicare.
Time to get mad as hell and let them know it by showing it.
And this is the same guy supporting the "con" party of NO who scream and complain about welfare to people making less than $20,000 per year. Funny how those people scream and complain all day about food stamps, social security, medicare, healthcare and the poorest 35% of this country getting ANYTHING at all from the government.
And then they flip on the "stupid" switch and are 100% "blind" to this, GE paying no taxes, Corporate Welfare in the HUNDREDS of billions, CEO Greed, and another article published earlier saying that CEO's reporting more companies are cutting expenses and hiring less for the upcoming year (because they have to free up money to pay their big fat 7-9 figure bonuses and salaries).
Yup, the party of NO. That is what we all need to tell them at next election time. And while they are at it, they can throw out the other bums, too. One of the few jobs in this country where you make a six figure salary for sitting in an office and doing essentially nothing.
Frackin crooked corrupt banks and their butt sucking partner, the us federal government have sex in bed with each other every gd night.
Not only are the crooks who run these gigantic rip off institutions stealing from you and me but our own CORRUPT, CROOKED, STEELING so called government, is in bed with all of these creeps, keeping you down so you have to go to the food banks and these gd frackin crooks get billions of dollars from our crooked federal government each and every year to keep up their work of stealing everything they can from the american consumer.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market ended the Wednesday session on a mixed note with small caps displaying relative strength. The Nasdaq Composite (+0.5%) and Russell 2000 (+0.4%) registered modest gains, while the Dow Jones Industrial Average (-0.2%) and S&P 500 (+0.01%) underperformed.
Despite the mixed finish, the key indices traded higher across the board at the start of the session after the advance reading of second quarter GDP surpassed estimates (4.0% versus Briefing.com ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'