Fascinating story from Bloomberg on the bottom-line cost — and benefits — of being too-big-too-fail.
Bank of America — along with Citigroup, JP Morgan, and Goldman Sachs — had exactly no days with trading losses in the first quarter of the year. Wells Fargo does not report such things, and no one is talking about how that bank performed, but it is a safe bet it was probably along the same lines. In other words, the bailout was an on-going, active thing. The details:
“The trading profits of the Street is just another way of measuring the subsidy the Fed is giving to the banks,” said Christopher Whalen, managing director of Torrance, California- based Institutional Risk Analytics. “It’s a transfer from savers to banks.”
The trading results, which helped the banks report higher quarterly profit than analysts estimated even as unemployment stagnated at a 27-year high, came with a big assist from the Federal Reserve. The U.S. central bank helped lenders by holding short-term borrowing costs near zero, giving them a chance to profit by carrying even 10-year government notes that yielded an average of 3.70 percent last quarter.
Nice work if you can get it. To roll out some 10-cent words, the Fed and the Treasury are essentially loaning the big banks the time-tested arbitrage of seigniorage — converting the ability to print money into profits. This after the banks’ complex — too complex it turned out — arbitrages of credit default swaps and derivatives built on sand ate capital rather than “created” it.
Watch and see if banks ever learn to live without this little boost in a “normal” credit and monetary environment.
