President Obama will unveil on Thursday a proposed levy on the nation's biggest financial firms structured not just to repay taxpayers for the bank bailout, but to recoup some of the public subsidy that "too big to fail" banks have enjoyed on account of their implicit government backstop, a senior administration official tells the Huffington Post.
This would be by far the government's most assertive step in starting to claw back some of the enormous profits the TBTF banks have reaped, first as a result of the bailout and then from the implicit guarantee that the government would back up the debt of major banks if they ever faced bankruptcy.
Because these banks effectively have the full backing of the American government, they are able to borrow at much lower rates than banks that have to borrow based on their own credit-worthiness.
The administration official tells HuffPost that the planned tax would be imposed in a way that targets firms' riskiest activities, such as proprietary trading. It would be crafted in a way that doesn't affect a financial company's retail banking, so that the cost theoretically would not be passed on to retail customers -- but it wasn't clear exactly how that would work.
"We want to put a price on the riskiest part of the bank," the official said, speaking of highly-leveraged Wall Street trading, rather than Main Street lending.
And, the official said: "They get a government backstop for free. We want to put a price on what the guarantee is."
The tax would be included in the president's upcoming budget, with the goal of implementing it for 10 years, starting next year. But many details have yet to be filled in and the reaction from Congress is uncertain.
The administration currently estimates that taxpayers will ultimately lose $120 billion from TARP, and that is the amount banks would have to repay over the life of this tax. While independent experts outside the Obama administration question that figure -- in August it was estimated at $341 billion, and a few weeks ago at $141 billion -- sources inside the administration say that the expected loss will probably be much lower.
"As the banking industry recovered, the president and the economic team felt it was important to discuss ways to recoup every dime for the American people more quickly than the law required," another administration official said, referencing the timeline sketched out by Congress when it authorized the Treasury Department to spend up to $700 billion in taxpayer funds to restart the country's financial system.
The implicit -- some say explicit -- government guarantee enjoyed by TBTF banks is one of the hidden public subsidies conferred by the government's intervention in the financial markets. It is rarely discussed when calculating the true cost to the taxpayers.
In a September study, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C., and a colleague calculated that since the failure of Lehman Brothers in September 2008 and the ensuing actions that enshrined TBTF, the 18 largest bank holding companies enjoyed significantly lower borrowing costs than smaller banks. He calculated the taxpayer-funded subsidy at $34.1 billion a year.
The implicit government guarantee is also why investors are betting that firms like Goldman Sachs and JPMorgan Chase will never default on their debt. The cost of insuring the debt of JPMorgan Chase against restructuring or default, for example, is next to nothing, about 0.44 percent, according to CMA Datavision. The cost for the state of California, the world's eighth-largest economy, is about six times higher.
In a December report, the Elizabeth Warren-led government commission created to keep tabs on the bailout concluded: "It is no doubt true that the perception of an implicit guarantee has grown in the wake of the government response to the crisis."
The administration's sudden interest in taxing banks is at least in part a proactive PR response to the popular outrage expected to accompany news in the coming days of multimillion dollar bonuses being showered on the executives of banks that most likely wouldn't have survived without a very expensive, taxpayer-funded rescue effort.
But some critics who feel the administration's policies on bailouts and financial reform have been too solicitous of big banks had a positive reaction to the administration's new proposal.
"This is a good principle and an important step," Simon Johnson, former chief economist of the International Monetary Fund and a professor at the MIT Sloan School of Management, wrote in an e-mail.
But, he added: "There is no logic that says it should be temporary. It should last as long as are there TBTF institutions, which is forever (in the plans of the administration)."
Johnson also argues that the administration's $120 billion tally for TARP losses is "low ball." TARP is a direct cost, he said. But the country needed a fiscal stimulus to restart the economy, which "was only needed because of what the banks did. They should pay for that also," he said. "There is no logic that says: reimburse us for TARP but the rest is on the house."
CEPR's Baker said that while the proposal is late in coming, "it's better late than never."
It's also what Cornelius K. Hurley, director of the Morin Center for Banking and Financial Law at Boston University and a former lawyer at the Federal Reserve, called for more than 15 months ago in an op-ed for Reuters.
"This would cause banks to 'right-size,'" Hurley said in an interview Tuesday. If banks want to continue enjoying their TBTF status, then they'd simply pay taxpayers for the benefit. If not, they'd shrink. "It would be self-enforcing," he said. TBTF banks should pay it every year, he said.
Influential Reuters blogger Felix Salmon, on the PBS Newshour Tuesday night, explained that the big banks "got much more benefit from the government than just the TARP money. The Federal Reserve injected trillions of dollars into the economy.
"The federal government went to extraordinary lengths to rescue the economy from the crisis which was largely caused by the actions of these banks. And, so, all of that money, the extra money which the government spends, the reduced tax revenue which the government is seeing, thanks to the enormous unemployment across the country, the huge fiscal deficit which has resulted from the biggest recession since the Great Depression, this is an enormous sum of money.
"And the only section of the economy which is really making windfall profits right now is the banking industry. And, so, it makes sense to tax them higher to help cover that gap."
He added: "The cost to the government of banking industry failure during the credit boom is much greater than just the $700 billion of TARP. It was trillions of dollars in total. And the banks, no matter how big this tax is, are only ever going to pay back a tiny fraction of that."
Investor and blogger Barry Ritholtz writes Wednesday morning that the new tax "could potentially do more than reduce the deficit -- if it goes far enough, it could actually solve the TBTF problem. Exempt small regional banks with under $25 billion in deposits. Make the tax progressive so it become increasingly larger as deposits become greater. $25-$50 billion in deposits is one fee (Let's say 0.1%, that's $25 million on $25 billion in assets). Have it scale to the point where its punitive -- 1% on a trillion dollars in deposits.
"The goal here isn't to raise money -- it's to force the TBTF banks to become smaller -- to break up the Citigroups and the Bank of Americas. This tax will restore competition to the banking industry."
Questions still remain. Rob Johnson, director of financial reform at the Roosevelt Institute and a former managing director at Soros Fund Management, wonders how the administration is going to measure the subsidy and subsequent payment to taxpayers. What if, for example, a bank gets a $4 billion benefit but only has to pay a $1 billion tax?
And Johnson, a former chief economist for the Senate Banking Committee, asks: "How are they going to get this tax passed if they can't even get financial reform?"
Some critics, however, have other concerns. William K. Black, a professor at the University of Missouri-Kansas City and a former senior federal regulator during the savings-and-loan crisis, argues that the because of spurious accounting rules adopted last year, banks aren't properly recognizing their losses, and are in fact largely insolvent.
He said now is the wrong time to be taking money out of the banking system because banks need it to guard against eroding assets like residential and commercial mortgages.
"We are blessing fictional numbers and believing our own lies," Black said. "Taking capital out of the system...it's a charade."
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