A bill proposed by U.S. Rep. Michael Capuano (D-Mass) may become part of a larger debate on disclosure of government subsidies, which can lead to market expectations that institutions have been deemed “too big to fail,” and are therefore in a better position to take risks than their smaller counterparts.
At press time, Capuano’s bill, HR 2266, does not have a co-sponsor. It calls for financial institutions with assets of $500 billion or more to establish and maintain a subsidy reserve. The task of writing the formula to determine how to report the level of their government support would fall to the Federal Reserve Board, and would have to be reported in annual financial statements. The subsidy reserve would have to be kept in a segregated account, and institutions would not be able to draw on it unless they sold assets, spun off a subsidiary or in other ways downsized. It couldn’t be applied toward Basel III.
A worrisome aspect is the call to link the firm’s marketability, in terms of shareholder expectations, to the factual material to be reported in annual statements. It’s difficult to assign a number to projected market value based on expectations. The closest we come is the “good will” figure that’s associated with a sale, but that’s for a transaction that has already happened, so there’s a real number to hitch it to. Doing it before the fact? Not so easy, because of the implied fiduciary responsibility involved. Moral hazard, anyone?
The proposed law would affect only the nation’s largest financial institutions. “Only,” of course, is relative, because of the significant downstream influence of companies that big. The proposal brings up technical considerations that are best addressed on the journalistic side.
In today’s national discussions, increasingly polarized by the issue of who or what gets government support, subsidies, whether overt or implied, have become the chew toy thrown into the puppy cage.
Someone ought to look in the U.S. government supply room to see how much more inventory qualifies as subsidy chew toys before considering how to write a formula for financial institutions. Among the categories of subsidies that directly relate to the implied marketability of the firms receiving them are the implied backstopping of Fannie Mae and Freddie Mac. That brought them back to profitability after the housing crisis swoon.
Then, there’s the support of FEMA’s national flood program, now $24 billion in the red. Is its help a subsidy to property owners?
The original intent of agricultural subsidies was to even out the price peaks and troughs for farmers. Now that Big Agriculture occupies so much of the nation’s food economy, are those subsidies still fulfilling their original role?
Last but not least, is the interplay between SNAP benefits and the large retailers that pattern their inventory cycles to the issuance those benefits. Is that a subsidy? Not under present law. And then, low-wage retail workers are eligible for SNAP – is that a subsidy to their employers? Not yet.
The Capuano bill is the tip of the iceberg on the current state of subsidies. It deserves attention. But to succeed, we’ll have to have a big-picture view of what it calls for, or our policymaking apparatus will go to the dogs.
