Update1: Banks: Villains, Victims, Or Just Easy Targets?by Tim Manni
“TARP will live on for years.”
President Obama announced a plan today that will tax the nation’s largest banks, financial firms, and insurers in order to recoup costs associated with the now expired TARP. Oddly, U.S. automakers have been omitted from paying the tax (can’t say we didn’t warn you).
As it stands now, the 10 largest institutions in the U.S. will have to pay 60% of the tax’s total cost. TARP losses are currently estimated to be roughly $117 billion. According to the Wall Street Journal, “…the tax will stay in place until all of the costs are recaptured.” Here are the tax’s specific details:
Under the proposal, a 0.15% tax would be levied on liabilities. The tax would apply to bank holding companies, thrifts, insurance companies that own financial arms and broker dealers with at least $50 billion in assets that received assistance under TARP, the FDIC’s temporary loan program or other crisis efforts.
The tax would be levied on total assets, minus a type of capital considered high quality, such as common stock, and disclosed and retained earnings. FDIC-covered deposits and insurance policy reserves would be untaxed because such assets are already subject to federal fees, the administration official said.
Under that formulation, banks that lean heavily on funding sources other than customer deposits would pay proportionally higher taxes. That means that Goldman Sachs and Morgan Stanley could get penalized. Another big loser could be Citigroup, whose main U.S. banking unit’s insured deposits represent a relatively small slice of the company’s liabilities.
The 2008 law creating TARP required the White House to come up with a proposal to recoup any losses. The White House and Treasury Department considered several different options, including a tax on bank profits or a tax on transactions made by large banks.
Ultimately, the White House opted to tax bank liabilities, seeing it as a way to constrain risk at specific firms. Liabilities, traditionally, are defined as what the bank owes — for example, customers’ deposits.
A Mess from Beginning to End
TARP has been a convoluted mess since its inception. First, the original purpose of the program (which still bears existence in the TARP acronym — ‘Troubled Asset Relief Program’) was changed. Then, the original nine TARP banks were forced (by some accounts) to take the money. Then, there were operating restrictions, then stress tests. All the while, Washington had implemented a system that allowed them to make money back from these “loans.” Now, as banks have begun to pay back their loans and return to profitability, a new penalty has been implemented that will no doubt increase consumer costs, and make lending more difficult:
Rep. Scott Garrett (R., N.J.) has said any tax or fee could hinder the economic recovery and further limit the industry’s ability to extend more loans. Mr. Dimon, when asked how any tax could be felt by consumers, said “all businesses tend to pass their costs on to their customers.”
While we understand that the White House was required to recoup any losses associated with TARP, we generally disagree with how they’re going about it. “Reactionary policy — or ever-changing policy — is never a good way to go about things,” said HSH VP Keith Gumbinger. “It simply creates more uncertainty.”
What About U.S. Automakers?
Why aren’t automakers required to pay back their billions? An administration official “defended the omission by contending that U.S. auto makers collapsed in part because of a financial crisis of the banks’ making.” To our knowledge, the automakers went under after decades of mismanagement — massive financial commitments to retirees, poor products, too many dealerships, and a collapse in sales of their most profitable vehicles (SUVs and trucks) in the wake of $4 – $5 gasoline. J.P Morgan Chase Chief Executive Jamie Dimon agrees:
“Using tax policy to punish people is a bad idea,” J.P. Morgan Chase Chief Executive James Dimon told reporters after a hearing in Washington. Mr. Dimon said it would be unfair for banks to be left shouldering the cost of the auto bailout.
We’ll be sure to update you when the president reveals the official details of what’s being called the “financial crisis responsibility fee.”