Bloomberg had an exceptionally good article yesterday  analyzing subsidies big banks receive from the federal government, explicit or otherwise.

Explicit subsidies are the in-your-face ones: Bank bailouts, borrowing from the Federal Reserve, that kind of stuff. But it's the implicit subsidies that really add up.

Small banks go bankrupt all the time. Just this year, 31 have bitten the dust. Investors and bondholders know this and demand a higher return in exchange. That increases the bank's cost of capital, dinging profits.

Big banks are different. Being too big to fail, the market believes (rightly) that you'll be bailed out if trouble strikes. Buying the bonds of big banks, then, becomes a low-risk bet -- there's an implicit government guarantee attached. The diminished risk means big banks can borrow cheaply, which gooses profits.

A recent study by two economists estimates that this implicit subsidy reduces a big bank's borrowing costs by 0.8% a year. Now here's the punch line, from Bloomberg (emphasis mine):

To estimate the dollar value of the subsidy in the U.S., we multiplied [0.8%] by the debt and deposits of 18 of the country's largest banks, including JPMorgan, Bank of America Corp. and Citigroup Inc. 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 every year on education.

Bank of America (NYSE: BAC), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), and JPMorgan Chase (NYSE: JPM) all produce historic returns on assets that average less than 1%. If the two economists' and Bloomberg's estimates are correct, just about all of these banks' profits are courtesy of government support.

Nice work, if you can get it.  

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