Goldman Sachs Group, Inc. (GS) Sets Everyone Straight on the TBTF Subsidy

After two years of reports from Bloomberg saying that the nations’ five biggest banks — Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), and Wells Fargo & Co (NYSE:WFC) — all receive an implicit taxpayer subsidy of approximately $83 billion because of their too-big-to-fail status, one of those named is disputing that notion.

The so-called TBTF subsidy is actually negative
The report, courtesy of Goldman Sachs Group, Inc. (NYSE:GS) Global Markets Institute, contests the notion that the six biggest U.S. banks — unlike Bloomberg, Goldman Sachs Group, Inc. (NYSE:GS) is including Morgan Stanley (NYSE:MS), as well — still have a funding advantage over smaller banks. Sure, they used to have one, the report states, particularly during the financial crisis. But, that’s all over now.

Basically, Goldman Sachs Group, Inc. (NYSE:GS) admits to a funding advantage of only 6 basis points for the biggest banks for the years 1999 to 2007, a much bigger advantage during the crisis years of 2008 to 2009, culminating in a distinct disadvantage from 2012. To average things out, the study purports that the six biggest banks enjoyed a bonus over smaller banks of 31bps from about 1999 to the end of the financial crisis, which they infer was around 2011. Currently, the report asserts, big banks are working with a 10bps disadvantage to smaller banks.

Still, there was an advantage, just not one as large as the 80bps that Bloomberg’s analysts used when they crunched the numbers for their previous articles, which they took from an IMF Working Paper published one year ago. In that report, the authors noted that the 80bps was firmly in place by the end of 2009, and had increased as a direct result of government bailouts, which raised the expectation that these banks would never be allowed to fail.

So, by applying the 31bps in place of the 80bps, the revised subsidy looks more like $32.2 billion*, and, similarly, a current penalty of about $10 billion, using Goldman Sachs Group, Inc. (NYSE:GS)’s claim of a 10bps handicap.