Ever since JPMorgan Chase's (NYSE: JPM) big trading boo-boo, there has been a nonstop dialogue regarding too-big-to-fail banks. Should they be more tightly regulated? Or broken up into manageable pieces?
As the opinions and analyses swirl, the too-big-to-fail banks keep chugging along, snug in their belief that things will go on as they always have. Usually, this means that they will continue to receive nice fat taxpayer subsidies at every turn. Here are three biggies that have made the news recently, proving just how nice it is to be one of the big boys.
Big banks get $76 billion each year, just for being themselves
The most recent media report of taxpayer giveaways to big banks concerns a subsidy that banks such as JPMorgan, Citigroup (NYSE: C), and Bank of America (NYSE: BAC) receive precisely because they are so huge. Bloomberg recently pointed out an IMF finding that creditors lend money more cheaply to too-big-to-fail banks since they know they'll be covered by the government when disaster strikes.
Bloomberg applied the 0.8% lending discount received by big banks to their deposits and debt to come up with the $76 billion total annual savings enjoyed by those institutions, which is "roughly equivalent to the banks' total profits over the past 12 months." Of this amount, JPMorgan gets about $14 billion yearly -- some of which the bank applies to salaries and bonuses.
HARP helps underwater borrowers, but helps banks more
When the federal government rejiggered the Home Affordable Refinance Program in the latter part of 2011, it did so to increase the chances that troubled borrowers would actually be able to access the program, which meant making it easier for banks to make the loans. Changes included making refinancing loans with the original servicer much easier, requiring less paperwork. The new rules also relieved banks of put-back risk if errors were found later in the origination of the loans, and removed the loan-to-value restrictions. The hope was that these incentives would encourage banks to participate in the program.
Well, it certainly worked. Since a handful of big banks command the majority of the mortgage-writing business, they're making out like bandits. Wells Fargo (NYSE: WFC), which currently originates one-third of all mortgages, is doing a land office business, while JPMorgan, US Bancorp (NYSE: USB), Bank of America, and Citigroup are also getting a hefty piece of the action.
In addition, they get to charge these borrowers a higher interest rate -- more than half of a percentage point over market. They also get a higher gain on sale when they package and sell these loans, since the chances are low that these borrowers will repay early. The nicest bit is that these are lousy loans that the banks wrote in the first place, so they get to make money off them twice -- approximately $12 billion more, just this calendar year.
Taxpayers will help banks pay for the robo-signing settlement
If you don't think HARP is helping banks enough, think again. The $25 billion "fraudclosure" settlement reached earlier this year by the Department of Justice and states' attorneys general with JPMorgan, Bank of America, Citi, Wells Fargo, and Ally Financial will apparently be funded, at least in part, by taxpayers and investors.
It appears that banks will have to put up very little under the terms of the settlement. Only $5 billion in cash will come from the banks to pay mortgagees who were illegally foreclosed upon. The other $20 billion will be credits the banks receive when they reduce underwater loan principal amounts.
Since banks are being allowed to use the HARP system to reduce the principal on some of these troubled loans, they will receive the incentives inherent in the program to offset any expenses on the banks' end. This can add up to $0.63 on the dollar, plus an unspecified bonus if borrowers stay current on their payments. More subsidies are available for banks that get on the stick and start this process in the first year -- which would explain why Bank of America was so prompt in sending out those initial 200,000 notices to underwater customers.
Investors may be on the hook as well. Banks get those incentives to write down any loan, whether they own it or private investors do. PIMCO is one of those investors that worries about being left holding the bag for the banks, since it fears that banks will tend to pare down loans other than their own, at least at first.
Business as usual
The government denies that the banks are getting a handout under HARP, claiming that eventually, the credits will come out of the banks' coffers. Even the former inspector-general of the Troubled Asset Relief Program has trouble believing that one, though.
So the business of banking goes on, as usual. And we can all sleep better knowing that HARP money helped prop up JPMorgan's first-quarter earnings this year, and that corporate subsidies contribute to Jamie Dimon's stellar pay package.
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