Wall Street demonstrates how quickly it could rebuild bank book capital levels

If the US adopted the Swedish Model and required its banks to recognize all of the losses hidden on or off their balance sheets, how long would it take the banks to rebuild their book capital levels?

A Bloomberg article discussing how there was no joy on Wall Street from their bonuses this year gives some insight.

Four years ago today, President George W. Bush signed into law the biggest corporate rescue in American history. Even as U.S. unemployment has remained above 8 percent for 43 months, the country’s biggest banks are making almost as much as they ever have. 

The combined $63 billion in profit reported by the six largest U.S. lenders over the four quarters through June is more than they earned in any calendar year since the peak in 2006. 

Bank of America Corp. made more in the 12-month period than Walt Disney Co. and McDonald’s Corp. combined. Citigroup Inc. (C), which like Bank of America took $45 billion in taxpayer funds from the Troubled Asset Relief Program, earned more than Caterpillar Inc. (CAT) and Boeing Co. JPMorgan Chase & Co. (JPM), the largest U.S. bank by assets, had profits of more than $17 billion even after reporting a $5.8 billion trading loss.

The banks make $63 billion per year.

Still, Wall Street isn’t enjoying its good fortune. 

Those billions of dollars in profits aren’t enough, according to interviews with more than a dozen bank executives and analysts. The lowest leverage in a decade, return on equity at a third of 2006 levels, higher capital requirements, shares trading below book value, declining bonuses, job cuts, the European sovereign-debt crisis and a backlash against bankers have damped the joys of profit, they said.

Oops!  The banks make $63 billion per year after banker bonuses.  If banker bonuses run at 40% of earnings, the bankers receive approximately $24 billion per year.

If banks had to retain 100% of pre-banker bonus earnings to rebuild their book capital levels, they could generate $85+ billion per year to do so.

In addition, banks could generate capital from having a one-time recapture of previously paid bonuses. If the losses were realized, this implies that the performance for which the bonuses were paid did not actually occur and Boards of Directors would have an incentive to recapture the bonuses that were paid.

Ok, but what are the sizes of the losses when the banks can no longer engage in what the Bank of England's Andrew Haldane calls "prevarication"?

Nobody knows!

However, we can get a sense for the banking industry's ability to rebuild its book capital if we imagine that the losses still hidden on and off bank balance sheets were the equivalent of a JP Morgan or, said another way, $2.7 trillion.  Clearly, this is a non-trivial amount of money.

Based on the bank's $85+ billion per year pre-banker bonus earnings, it would take slightly under 32 years to rebuild their book capital levels.

That seems like an awfully long time.  But it isn't when you consider that Japan has not required its banks to realize their losses and Japan has been battling its financial crisis for 2+ decades.

Having pursued the same strategies as Japan, we are 5 years into our financial crisis with, as Paul Krugman said, no end in sight.  If we had pursued the Swedish Model from day 1 of the crisis, the financial crisis would be over for the real economy and society and the banks would have only 27 years left to rebuild their book capital levels.