President Obama is proposing a tax on "too big to fail" banks to pay back the $120 billion in taxpayer money that we expect to lose from the Troubled Asset Recovery Program ("TARP") -- the bank bailout.
The proposed tax would also exact a payment for the "implicit guarantee" that the government will pay the debts of any big bank that becomes insolvent.
Republicans hate taxes, so they'll probably be against this one. But Republicans proposed exactly the same legislative measure a decade ago for Fannie Mae and Freddie Mac, and they did so for exactly the same reasons.
Republicans now claim that they warned us years ago that Fannie and Freddie were making loans to poor folks who couldn't pay them back. That wasn't what Republicans said at all.
Republican criticism of Fannie and Freddie was part of an internecine battle in the financial industry between Fannie and Freddie on one side, and their competitors, institutions like Bear Stearns, AIG and Merrill Lynch, on the other.
Fannie's and Freddie's critics in the financial industry -- and their Republican allies -- argued that Fannie and Freddie had an "implicit guarantee" from the federal government that amounted to an unfair subsidy.
The guarantee was that the federal government would never allow Fannie or Freddie to fail. Fannie and Freddie were shareholder-owned corporations operated for a profit, but they began as government agencies that bought mortgages from banks so banks could lend more money.
Fannie and Freddie held some of the mortgages, and packaged other mortgages and sold "mortgage-backed securities" to investors.
As a result, mortgage credit was plentiful and cheap, and the home ownership rate soared.
Mark Zandi, Sen. John McCain's (R-Ariz.) economic adviser in the 2008 campaign, told USA Today in 2002 that the creation of Fannie and Freddie was "the most successful policy initiative ever undertaken by the government."
Fannie and Freddie did very well by doing good. In 2001, Fannie was 13 and Freddie was 18 on Fortune Magazine's list of the most profitable corporations.
But Fannie and Freddie no longer had the business of buying mortgages to themselves. Others in the financial industry were buying mortgages and selling mortgage-backed securities, also quite profitably.
The competition was bitter. Fannie's and Freddie's competitors argued that the "implicit guarantee" allowed Fannie and Freddie to borrow at lower interest rates. A Congressional Budget Office study estimated that the lower interest rates were a $6 to $7 billion federal subsidy, or about 40 percent of Fannie's and Freddie's profits.
So what was the origin of the guarantee, and the supposed taxpayer subsidy?
Fannie and Freddie were "privatized" during the Johnson Administration, critics argued, but they still had a smallish line of credit with the government; the President appointed members of the Boards of Directors of both Fannie and Freddie; and so forth.
But most of all, Fannie and Freddie were just too big to fail. The collapse of Fannie or Freddie would have catastrophic consequences for the economy. No administration, Democratic or Republican, would allow that.
Those criticisms of Fannie and Freddie have been vindicated by events, of course.
Is there any doubt that the same criticisms now apply to Fannie's and Freddie's critics? The "systemically significant" banks that received TARP funds all obviously enjoy the same "implicit guarantee" that Fannie and Freddie had. Community banks, banks that are small enough to fail, now complain about the unfair competitive advantage that the big banks get from the federal government's implicit guarantee.
The big banks are now fiercely fighting the very limitations that they urged for Fannie and Freddie a decade ago, including this, first suggested by the Congressional Budget Office and embraced by Stephen Moore, testifying before Congress in 2000 as an "Adjunct Fellow" at the Cato Institute: "a 'user fee' of 10 to 20 basis points on [Fannie's and Freddie's] debt to level the playing field between Fannie and competitors."
"The user fee is a partial payment for the implicit guarantee it receives from Uncle Sam," Moore said. "The rationale behind such a fee is that since taxpayers are bearing an implicit risk on Fannie Mae activities, it is reasonable that the federal government recoup fees to pay for that assumption of risk. The main advantage of such a fee is that it would help level the playing field between Fannie Mae and its fully private competitors."
What part of that rationale does not apply to President Obama's proposed tax on large, "systemically important" banks that have already been rescued once?
So if we just call President Obama's too-big-to-fail tax a "user fee" instead, will the idea have bipartisan support? Don't count on it.
Rep. Brad Miller (D-NC) is a member of the House Financial Services Committee and author of key elements of the Wall Street Reform Consumer Protection Act that recently passed in the House.
Of course it won't, but it might make the connection obvious enough for the corporate media to mention it.
As the housing bubble grew, new and poorly underwritten mortgage products helped fuel asset appreciation, excessive speculation, and far higher credit losses. Mortgage securitization (and you owe it to your readers to explain this term) had many major flaws that ultimately added risk at a level never experienced before in this country.
At the center of all these issues were land developers and real estate companies looking to optimize their financial standing in life. Banking executives have recently testified they played a part in this. Yet, we have people in our country who want to return to the failed policies of the past.
http://www.fcic.gov/hearings/pdfs/2010-0113-Dimon.pdf
Read page 8 of the above link. Decide for yourself. Read it then decide for yourself what the real estate industry, land developers and lending institutions have done to this country.
So what if the Repubs did something a decade ago, is that your benchmark ?
What have you done in your terms to improve the lives of all of the people ?
This does not include transferring wealth from one to another.
Who is John Galt.
Please, dems have destroyed the fiscal responsibility of this country for the last 3 decades. Blaming Obama for trying to fix it is wrong. I dont think hes working for the right people but our debt has mroe to do with the gop then anything else and the lack of non corrupt people in congress both dem and rep.
Whom are you to decide whom does or does not need to be taxed on a benefit of their work ?
Do you think that people whom happen to be lawyers, doctors, bankers, financial experts, sales people, dentists, business owners, or anyone else whom has sacrificed to go to go to college, go onto professional school, (whiles working jobs and taking out loans to accomplish their goals), start out work in debt, and then work more hours than most people believe a person should work ?
The banks have paid. What about Chrysler and GM,,,we keep thowing money down those holes ($4Billion more to GMAC last week) and we will never get that back though the unions sure did get their skis waxed didn't they.
How about an award for FORD motor for going it alone ?
Cadillac plans.....Yes Big Brother...whatever you say.
And considering that the banks have paid 2/3 of the TARP funds that were borrowed (and forced on some banks who didn't want it by the Bush Admin) with interest, shouldn't Obama be telling this to the auto industry who hasn't and will probably NEVER will pay any of their TARP back?
I guess this is kind of like the backroom deal cut yesterday where the middle class will be have to taxed at a higher than rate on their Cadillac Health Plans to cover the cost of the union's Cadillac Health Insurance Plans who will be exempted till 2018........ only in this case, its the banks who will be taxed in order to cover the losses to TARP from the auto industry.
I swear, Obama has this 'rob Peter to pay Paul' thing down to an art doesn't he?
It was like every one in congress and the Bush administration was too lazy to do their homework.
And that criticism can be added to the Main Street handing their money over to Wall Street argument. Why not do things like pay off consumer's loans and credit cards-- that puts money back in the banks that otherwise might be defaulted on and allows consumers a fresh start. Why all the concern for Wall Street and none for Main Street? Effen this corportocracy.
They both share the goals of growing government power and wealth and depleting the rights, opportunities, and wealth of citizens, and they both work hand-in-hand with complicit leaders in banking, industry, media, and the church to accomplish those goals.
No conspiracy theory, simply an understanding of human nature and the innate personalities of Type A's.
If the issue is that people will not think the government will be able to withstand the calls for further bailouts of "too big to fail", then make them smaller by regulating divestment of some of the parts.
If the issue is getting back the TARP funds. This makes little sense. The banks have paid them back. It is General Motors and AIG that are likely to be the losers. Why continue to punish success and reward failure?
If it is to increase lending....why reduce the banks return which will force them to either raise rates or reduce lending?
Seems like just a convenient tax.
This is the most corrupt congress I have ever seen. I would not give the time of day to any of them.