Tags: Banks | Constitutional | Right | Free Money

Banks Claim Constitutional Right to Free Money

Banks Claim Constitutional Right to Free Money
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Wednesday, 04 May 2016 07:37 AM Current | Bio | Archive

Few sights are more pathetic than a whiny banker. Accustomed to free money and the exclusive right to create more, they panic at the slightest hint their gravy train might have a caboose.

Last year Congress decided to reduce the 6% dividend that large banks receive from shares they must own in their regional Federal Reserve Bank. Instead of a fixed 6%, now banks with assets over $10 billion will receive an amount equal to the 10-year Treasury yield.

The difference will instead go into the federal highway trust fund.

The banks flipped out at this idea. So did the Fed, which told Congress it was a terrible idea. The bill passed anyway and now the Fed must implement it.

How much are we talking about? Based on current Treasury yields, the big banks will lose about $700 million a year.

This “dividend” is not like any that you or I can get. For one thing, it is completely risk-free for the banks; their stock cannot lose value. Even if the Fed should disband (fat chance), they get their full principal back.

Furthermore, the dividend is tax-free for banks that joined the Fed before 1942. The largest ones like JPMorgan Chase (JPM) all did so.

The original point back in 1913 was to entice banks into the newly-created Fed system.

Today the law requires all nationally chartered banks to join the Fed, so they don’t need enticing. The dividend is more like the deposit on a rental property than company stock.

Last week the American Bankers Association sent a comment letter to the Fed outlining its frustration. This is probably the first step toward a court challenge.

As David Dayen reported for The Intercept, the ABA letter argues that reducing the bank dividends is an unconstitutional “taking” under the Fifth Amendment. The banks say their Fed shares are property and they are entitled to income from the shares. They actually used that word “entitled,” too.

(I’ve heard bankers say we need “entitlement reform.” Well, here you go. We might as well start at the top.)

In fact, the banks are entitled to nothing, much less a 6%, tax-free, no-risk dividend not available to anyone else on the planet.

An earlier Congress created the Federal Reserve System with a particular set of rules. Today’s Congress can change those rules if it wishes. Nothing in the Constitution says otherwise.

The same applies to Social Security, by the way. The law requires we all pay FICA taxes. The Supreme Court says Congress doesn’t have to give us anything in return.

That, I suspect, is what really chaps the ABA.

The bankers don’t need the money. Their real objection is to having to follow the rules like everyone else does. Usually they get a pass. 

Not this time.

Patrick Watson is an Austin-based financial writer. Follow him on Twitter @PatrickW

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Few sights are more pathetic than a whiny banker. Accustomed to free money and the exclusive right to create more, they panic at the slightest hint their gravy train might have a caboose.
Banks, Constitutional, Right, Free Money
476
2016-37-04
Wednesday, 04 May 2016 07:37 AM
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