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January 14th, 2010

Update1: Banks: Villains, Victims, Or Just Easy Targets?



“TARP will live on for years.”
-Elizabeth Warren

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.”

Reactionary Policy

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.”

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8 Responses to “Update1: Banks: Villains, Victims, Or Just Easy Targets?”

  1. Lucia Says: January 14th, 2010 at 4:54 pm

    Our regional bank was forced to take a TARP loan so that the cost of absorbing a troubled bank in another state (also forced) would be covered.

    If the consumer finds it more expensive to deposit their savings in a bank, wouldn’t that force the consumer to find another place for their savings? Is the government trying to discourage the consumer from being a saver?

  2. Tim Manni Says: January 14th, 2010 at 7:03 pm

    Lucia! Great to hear from you again, it has been a little while.

    We couldn’t agree more. Washington is completely insane if they think banks won’t pass on these costs to consumers — Dimon said it himself in the WSJ article. So let me get this straight, we give institutions billions in taxpayer dollars b/c they’re at risk of failing and so that they can lend to taxpayers, then we tax the banks who will in turn charge taxpayers.

    Makes perfect sense to me…Not Really.

    Great to hear from you again,


  3. GeorgeQ Says: January 15th, 2010 at 9:05 am

    It my understanding the AutoMakers are not paying back most of the billions of dollars get recieved.

    GM is paying something like 5 billions , the rest has been converted into the new GM equity, which means we wont see any of it.

    I am not sure about the Chrysler money , as the whole company was gifted away.

  4. Steve Says: January 15th, 2010 at 9:56 am

    By the Treasury’s own admission (press release of 12-09-09), the government has realized a significant profit on the portion of TARP money lent to banks. And, of the $247 billion lent to banks, $181 billion has been repaid.

    By contrast, the TARP money lent to automakers, AIG, and CIT Financial, none of which are banks, has not done very well at all. Of the $227 billion lent to them, $4 billion has been repaid. I doubt anyone is forecasting a profit to the government on those TARP monies.

    So why is this administration going after the banks again? Cowtowing to populist pressure, led by that noted economist Michael Moore, among others, may be one reason. Figuring that, since the banks are doing such a good job of repaying TARP money, they can ante up some more money, may be another reason (Willie Sutton, call your office). Or maybe this adminsitration just doesn’t get it.

    On the one hand, the president berates banks for not lending enough. At the same time, his regulators are telling banks to write down the value of troubled assets, boost reserves, and underwrite more tightly, all of which will tend to restrict lending. Please, will someone in this administration try to get some coherence?!

    [Full disclosure: I work for a small community bank, and bear no love for the large banks. But come on: fair is fair.]

  5. Tim Manni Says: January 15th, 2010 at 11:04 am


    You got it — according to Obama’s plan, automakers are exempt from paying the tax.

    What really got me was that one administration official said something along the lines of ‘US automakers are exempt b/c the problems on Wall St. led to their demise’ (not a direct quote). Are you kidding me? Remember $4 gas? Remember GM and Chrysler cutting thousands of dealerships? Remember consumers’ 180 from SUVs to compacts? What about huge retirement packages? There were a host a reasons that GM and Chrysler failed far beyond Wall Street. If anyone should have to pay back taxpayers, the U.S. automakers should be close to the front of the line.

    Ha, sorry for that rant George, thanks for commenting,

  6. Tim Manni Says: January 15th, 2010 at 11:10 am


    You couldn’t be more on the mark with your comments!

    We too haven’t been advocates for big banks, but this just doesn’t seem right. For example, banks will have to pay this tax even though they’ve paid back their loans…how is that fair?

    Banks (and a lot of others) continue to receive such mixed messages it’s a wonder how they’re still operating. Let’s get some consistency here so we can all move forward.

    You made some excellent points, well done. Please comment again soon.


  7. Visionary Realty News by Visionary Agents w/ American Home Hunters » Weekend Notes: Looking Back at 2009 as it Blends into 2010 Says: January 18th, 2010 at 2:58 am

    [...] More than Expected in Fourth Quarter of ‘09: Hey, at least they’ll have money to pay the new “financial crisis responsibility fee.” J.P. Chief Executive Jamie Dimon’s not-so-optimistic comments note some of their struggles [...]

  8. Visionary Realty News by Visionary Agents w/ American Home Hunters » Weekend Notes: Looking Back at 2009 as it Blends into 2010 Says: January 18th, 2010 at 2:58 am

    [...] More than Expected in Fourth Quarter of ‘09: Hey, at least they’ll have money to pay the new “financial crisis responsibility fee.” J.P. Chief Executive Jamie Dimon’s not-so-optimistic comments note some of their struggles [...]

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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