Do Bank of America and Citigroup Need This Subsidy?

Last summer, Bloomberg's revelation that JPMorgan Chase (NYSE: JPM  ) received a de facto taxpayer subsidy of $14 billion made tongues wag for a time, but the subject eventually faded into the background. Of course, the Bank of Dimon wasn't the only bank receiving a helping hand with its borrowing costs, but Jamie Dimon's appearance in Washington to answer questions regarding the London Whale trading debacle naturally put his bank in the spotlight.

This year, the update on this issue has come out before the advent of spring, and the numbers have climbed a bit. Whereas last year's news reflected a total subsidy, as of 2009, of approximately $76 billion for the 18 largest U.S. banks, the most recent article has bumped that amount up to around $83 billion. It is estimated that JPMorgan's cut has risen to over $17 billion.

Five largest banks get the most gravy, but do they need it?
Bloomberg notes that, of that $83 billion, the top five banks gobble up about $64 billion. Besides JPMorgan, Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , Wells Fargo (NYSE: WFC  ) , and Goldman Sachs (NYSE: GS  ) all get a sizable chunk of taxpayer charity.

The article explains that the subsidy is an implicit part of the TBTF landscape, whereby these large institutions are considered so systemically important that they must be pampered like toddlers lest they topple and take the whole economy with them. We've already been there, of course, and this seems to be the way the big banks' supposedly fragile ecosystem is being handled since the financial crisis.

This subsidy isn't direct, but it comes about as banks receive extremely favorable financing terms because creditors assume they will be rescued if anything goes awry. Still, it's a lot, and it makes you wonder whether these banks really need this much support. Unfortunately, it appears they do.

B of A and Citi: negative profit without the subsidy
From Bloomberg's calculations, which were annualized over 10 years, JPMorgan would make a small profit without the subsidy, as would Goldman. B of A and Citi, though, would be in negative profit territory if the subsidy was taken away. Only Wells Fargo would produce a somewhat decent return without the additional backup.

What would happen to Bank of America and Citi if this goody bag was suddenly unavailable? Normally, I wouldn't count on anything being done on this score, but Ben Bernanke's appearance before the Senate Banking Committee last week might have lit a match under this issue.

When the Fed Chair was asked by freshman Senator Elizabeth Warren whether or not banks should be paying for this subsidy, he responded that banking reforms are attempting to change the need for such a helping hand. Also, when pressed, he said he believed the subsidy should end.

Nothing may happen, at least for a while -- but each time this subject comes up, it gets a little more oomph behind it. It looks like B of A and Citi had better get going on the mortgage-lending biz, or both may find themselves with very irate investors in the not-too-distant future. 

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Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2013, at 11:34 AM, Pastblaster wrote:

    Cut military defense, cut social programs, cut benefits to the elderly and the poor, cut education, cut, cut, cut...............but.............give banks $83 BILLION DOLLARS??? How insane is this government we have??? Let the profitable banks stand and the unprofitable ones close. Why should the government prop up big business??? Let them stand or fall on their own.

  • Report this Comment On March 04, 2013, at 11:52 AM, IOWNYOU wrote:

    Just goes to show how banks and corporations run the government and not the people. Shameful times we live in.

  • Report this Comment On March 04, 2013, at 12:09 PM, JoeB16 wrote:

    What ever happened to the strongly pushed mantra to let the free market decide who gains and who fails - I guess that old saying of what's good for the goose doesn't apply to banks that "are too big to fail" - you won't hear any republicans jumping on this bandwagon even though the free market mantra is their sacred slogan!

  • Report this Comment On March 04, 2013, at 1:16 PM, rickpp wrote:

    Frankly I feel that no banks should be receiving subsidies or so called 'tarp' funds.

    Let the free market take over - as quite a few of these banks lead by B of A have been Deceiving, Lying, Cheating Customers for years - and are never called on it.

    B of A employees greet customers when they come into a branch - while corporate is quietly devising ways to screw customers and impliments strategies to overcharge customers

  • Report this Comment On March 04, 2013, at 6:01 PM, Independthought wrote:

    No! More to the point, No more Corporate Welfare.

    The first time when we said told our Government no, not to bail them out. They just waited and then went behind our back and gave them the money.

    Clearly they are not listening to us and the large investors no longer watch real signs of recovery but the Federal Reserve instead for more handouts, also known as Quantitative Easing.

  • Report this Comment On November 16, 2013, at 9:14 AM, mythicalmike4 wrote:

    This kind of baseless article is becoming all too common. "This subsidy isn't direct ... ". How about banks increase the rates they charge when they lend when their lending rates get less favorable. That is how profits are made. If my costs go up as a business then I charge more for my product. The you guys can complain about banks ripping you off with higher interest rates. Just another article trying to reestablish the bank bashing trend. Move on people.

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