MacroScope

Priceless: The unfathomable cost of too big to fail

Just how big is the benefit that too-big-to-fail banks receive from their implicit taxpayer backing? Federal Reserve Chairman Ben Bernanke debated just that question with Massachusetts senator Elizabeth Warren during a recent hearing of the Senate Banking Committee. Warren cited a Bloomberg study based on estimates from the International Monetary Fund that found the subsidy, in the form of lower borrowing costs, amounts to some $83 billion a year.

Bernanke, who has argued Dodd-Frank financial reforms have made it easier for regulators to shut down troubled institutions, questioned the study’s validity.

“That’s one study Senator, you don’t know if that’s an accurate number.”

Here’s more of the rather heated exchange:

Bernanke: “The subsidy is coming because of market expectations that the government would bail out these firms if they failed. Those expectations are incorrect. We have an orderly liquidation authority. Even in a crisis, we, in the cases of AIG for example, we wiped out the shareholders…”

Warren: “Excuse me, though, Mr. Chairman, you did not wipe out the shareholders of the largest financial institutions, did you, the big banks?

Citi solicits staff donations for its political lobby

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Citigroup, the third largest U.S. bank, is actively soliciting donations from its employees for its political action committee (PAC) or fundraising group. In a letter to staff obtained by Reuters, the bank stressed the importance of the upcoming presidential and Congressional elections, urging staff to give to Citi’s PAC. From the letter:

Our Government Affairs team already does a great job promoting our positions on important issues to lawmakers, but there is one thing that each of us can do to enhance their efforts: contribute to Citi’s Political Action Committee (PAC).

Citi PAC is one of the most effective tools we have to amplify the voice of the company in Washington and enhance our profile with lawmakers.  The PAC provides the resources to help suport government officials who share our views on key policy objectives and who understand the impact various policy decisions may have on overall economic investment and growth.

from Breakingviews:

Citi, BofA prove too big to punish harshly

By Agnes T. Crane

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Sticking it to Uncle Sam should attract harsh punishment. But the fines Citigroup and Bank of America will pay - $158 million and $1 billion respectively - to settle claims they defrauded the U.S. government look easily handled. Citi has even admitted fraud in its dealings over home loan insurance. A ban from participating in the government’s mortgage insurance programs would be a better deterrent. But unfortunately, Washington needs big banks too much.

BofA’s alleged misdeeds are still murky since its settlement was conveniently wrapped up in the broader $25 billion deal between federal and state enforcers and big mortgage servicing banks over so-called robo-signing transgressions. But the complaint against Citi offers a brutal account of the drive for profit squashing quality control. The Federal Housing Administration ended up insuring shoddy Citi mortgages that, in some cases, were in default within six months.