Obama Signals He's Going to Start Making Wall Street Pay
by Faiz Shakir, Amanda Terkel, Matt Corley, Benjamin Armbruster, Zaid Jilani, and Alex Seitz-Wald
President Obama laid out his proposal for a new bailout tax on the nation's largest banks yesterday, saying he wanted "to recover every single dime the American people are owed" for saving the financial industry. If approved by Congress, the Financial Crisis Responsibility Fee would be assessed on so-called "too-big-to-fail" financial institutions with more than $50 billion in assets for the next 10 years or longer -- until the government recovers its losses from the Troubled Assets Relief Program (TARP). The tax would not apply to a firm's deposits, which already come with a fee from the Federal Deposit Insurance Corporation (FDIC)The administration expects to lose about $117 billion on TARP, and since the program successfully saved the financial industry from going the way of Lehman Brothers -- and because banks are now enjoying windfall profits -- Obama wants them to cover this loss. The American people provided "extraordinary assistance" to the financial industry, Obama said yesterday, and "continue to face real hardship in this recession." Meanwhile, it's bonus season on Wall Street and financial firms are expected to give their employees a record $145 billion for 2009. As Obama said yesterday, "Instead of sending a phalanx of lobbyists to fight this proposal, or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities. And I'd urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives."
MAKING WALL STREET PAY: The tax is an effort to recoup losses from the TARP, the $700 billion lifeline to the financial industry enacted in the twilight of the Bush administration. The expected cost of the program has dropped dramatically since its inception. In August, the Obama administration projected a loss of $341 billion, but the White House said yesterday that thanks to "prudent management and the stabilization of the financial system," the cost will be down to about $117 billion. The new tax -- which would go into effect in June -- is modeled on the fees assessed by the FDIC and would collect the $117 billion in about 12 years. Citigroup, J.P. Morgan Chase, Bank of America, Goldman Sachs, Morgan Stanley, and Wells Fargo would bear about 60 percent of the burden, with each facing an annual bill of $1 billion or more. U.S. subsidiaries of foreign firms would face the new tax, but small and community banks would be exempt. While most banks have already paid back their portions of TARP, as White House economic adviser Austan Goolsbee told CNBC, the government has not charged the banks for the huge emergency guarantees provided to them by the FDIC, nor for allowing investment banks to convert to deposit banks, which gave them access to loans from the Federal Reserve. Moreover, the entire sector has benefited from taxpayer help. The government has provided financial firms with trillions of dollars in low-interest loans and outright equity purchases through programs like the Federal Reserve's Discount Window and loan guarantees, and they also benefited from the bailout of AIG. TARP represents only a small portion of the total support for the financial sector, so even firms that did not receive funds under the program -- or have already paid back their portion -- owe taxpayers.
STICKING UP FOR THE BIG GUYS: Predictably, the financial lobby and bank-friendly Republicans have come out strongly against the tax. Edward Yingling, president and CEO of the American Bankers Association, called the plan "perplexing," saying that "yet another burden on the industry" will hurt lending. Scott Talbott, of the Financial Services Roundtable, said the tax would "stifle the industry," while another banker called it an "absurd idea." The financial firms argue that they have already paid back their portions of TARP (or are in the process of doing so), and the tax will "constrain bankers' ability to make new loans" by increasing the regulatory burden and draining capital. Republicans were quick to parrot the banking industry. Minutes before White House Press Secretary Robert Gibbs briefed reporters on the tax, Republican National Committee chairman Michael Steele slammed the proposal, calling it "nothing more than another tax on the American public." "The fact is this money has already been paid back by the banks and this punitive tax will hurt Americans' savings and discourage job creation." Rep. Spencer Bachus (R-AL) said "the tax will only drain capital from the financial system at a time when it's needed to create jobs and fuel economic growth," and Rep. Jeb Hensarling (R-TX) said the proposal's aim is "frankly lunacy."
A FAIR DEAL: Conservative and industry attacks on the bank tax ring hollow because the president is required by law to make sure the TARP does not contribute to the deficit and to have a revenue raising mechanism in place by 2013. The argument that the tax will hurt lending because it will drain capital is also weak. After all, banks were more than willing to dole out $145 billion in bonuses in the last year alone. And as The Progress Report's Pat Garofalo noted, "[I]f the banks try to pass on the cost of the new tax, that simply gives other, smaller banks an opportunity to keep their prices stable and grab some market share." Even former Merrill Lynch CEO John Thain -- hardly a paragon of banking virtue -- said that banks can handle a bailout tax. "[T]he bigger they are, the more complicated they are, the more you charge them," he said. Still, some on the left argue that the administration should use the tax to recoup losses beyond the TARP. As the Washington Post's Ezra Klein wrote, "If what you're trying to do is recoup the TARP losses, this is a smartly designed tax. But we should be more ambitious than than that." Garofalo agreed, writing, "The banks' survival -- and their ability to make huge profits so soon after they were staring into the abyss -- did not start and end with TARP, and neither should their debt to taxpayers be satisfied solely by paying back their TARP funding." Some economic experts, including the Center for American Progress' Michael Ettlinger, have floated the idea of a financial transaction tax to reduce the deficit and raise revenue in the long-term. Regardless of the scope, a tax on the banks to recoup the bailouts is necessary to reduce the deficit and maintain the long-term stability of the financial industry. As Gibbs said in his press briefing yesterday, "If you want to be on the side of big banks then you're certainly -- this is a great country; you're free to do so."