With the Government Accountability Office scheduled to release its report on the "too big to fail" subsidy this fall, Wall Street consultants, think tanks and lobbyists appear to be doing their best to swing the report in their favor. Abby McCloskey of the American Enterprise Institute has even argued the funding advantage for these large and systemically risky institutions, which benefited from trillions of dollars in federal assistance during the financial crisis, is actually a disadvantage. Unfortunately for the "too big to fail" set, the facts are not in their favor.
McCloskey takes issue with a 2012 report from International Monetary Fund economists Kenichi Ueda and Beatrice Weder di Mauro that found "too big to fail" firms had a cost-of-funds advantage of 80 basis points. A Bloomberg View analysis concluded this amounted to an $83 billion annual funding advantage for the largest financial firms compared to smaller institutions that cannot borrow at the same artificially reduced rates as the big boys.
McCloskey thinks this estimate is a bit high. Why? Because at the time of the study they say the funding advantage skewed higher than its historical average. After all, in the years following the financial crisis they caused, these institutions were in the process of benefiting from trillions of dollars in financial assistance from American taxpayers. Poor Wall Street—I guess the IMF economists just caught them at the wrong time, precisely when they were failing.
McCloskey is more comfortable with funding-advantage estimates at the bottom of the spectrum, which come in at roughly 20 basis points. This, she says, more accurately reflects the long-term cost-of-funds advantage and amounts to a mere $20 billion annual taxpayer subsidy for "too big to fail" firms. To them, this must seem like a small price to pay for having institutions so large and risky, they pose an existential threat to our financial system.
Nevertheless, there have been numerous studies on the funding advantage enjoyed by the largest financial institutions, and virtually all of them have concluded that such an advantage exists. I would expect no different from the GAO. There is no better time to measure the subsidy than when it is obvious.
Further, while the credit ratings agencies have downgraded the megabanks due to Wall Street reforms, that doesn't mean the government guarantee has disappeared. Standard & Poor's said in April that passage of the Brown-Vitter Act, still pending in Congress, which would boost capital requirements at the largest institutions, could result in lower credit ratings for the megabanks. This assertion shows the rating agencies continue to price the "too big to fail" guarantee into these institutions' credit ratings.
Worse than nitpicking about the size of their multibillion-dollar cost-of-funds advantage, McCloskey attempts to deduct the regulatory costs of being "too big to fail." Citing an estimated $34 billion annual cost of complying with the Dodd-Frank Act, she claims that Wall Street actually operates at a disadvantage. This is absurd. As Boston University professor Cornelius Hurley wrote, large bank compliance costs and penalties should not be discounted from these funding estimates. These are the costs of being unmanageable, and taxpayers should not be on the hook for them. As Hurley noted, the GAO should focus on the gross benefit of being "too big to fail," not the benefit net of fines, penalties and regulatory burdens. The fact is community banks have a proportionate disadvantage to taxpayer-subsidized megabanks as the crushing burden of regulation meant to stop the abuses of Wall Street rain down excessively on Main Street.
After bringing us fraudulent and destabilizing mortgage-backed securities, Libor-rigging, the London Whale trading fiasco and more, Wall Street and its proponents should not be allowed to engage in a bit of numerical sleight of hand. We can only hope that, after all that our nation has been through in the past five years, the GAO will see through the smoke and mirrors.
Camden R. Fine is president and CEO of the Independent Community Bankers of America.