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?

Financial headcounts stabilize in 2009

After financial firms slashed hundreds of thousands of jobs in 2007 and 2008, the bloodletting slowed in 2009 as major banks rebounded from the financial crisis. Even though firms like Goldman Sachs Group Inc and JPMorgan Chase & Co reported billions of dollars in profit, they still did not announce major hiring initiatives.

Recession layoffs Headcount (end 2008) Headcount (end 2009) Bank of America 45,000 240,202 283,717* Citigroup 75,000 323,000 265,000 Goldman Sachs 4,800 34,500 32,500 J.P. Morgan 23,700 224,961 222,316 Morgan Stanley 8,680 45,295 61,388* UBS 19,700 77,783 65,233 Credit Suisse 7,320 47,800 47,600 Barclays 9,050 152,800 144,200 Deutsche Bank 1,380 80,456 77,053 Santander 2,600 170,961 169,460

* Includes additional employees from Morgan Stanley Smith Barney merger and Bank of America’s merger with Merrill Lynch, both of which were completed in 2009 (Steve Eder and Steve Slater)

Cancelling Christmas

How’s this for a merry little Christmas?

Before the U.S. holiday shopping season even begins, Morgan Stanley’s chief U.S. economist has given up on consumer spending — not only through Christmas ’08 but all the way until next summer at the earliest.

“As we see it, the current collapse in consumer spending likely will be the most severe and longest in the postwar (World War Two) period,” economist Richard Berner wrote in a note to clients. ”The recovery in consumer spending likely will be moderate as consumers embark on a long period of rebuilding thrift.

Why so grim? Well, between the 1.2 million jobs lost since the beginning of the year and the downdraft in the housing and stock markets, income is taking a hit and household wealth is down about $7 trillion. Yes, trillion with a ‘T.’ Oh yeah, and there’s that credit crunch.