Obama to Announce “Too Big to Fail” Tax: One Decade of Taxes, $90 Billion Collected

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Image: The Stockmasters

President Obama will announce his new bank tax today. Code-named the Financial Crisis Responsibility Fee, the tax will stay in effect until all TARP funds are covered. From the New York Times:

The new tax on banks, insurance companies and brokerages with more than $50 billion in assets would start after June 30 and seek to collect $90 billion over 10 years, according to a senior administration official who briefed reporters late Wednesday.

But the levy but would remain in force longer if all losses to the bailout fund, the Troubled Asset Relief Program, are not recovered after a decade. Administration officials now say that the losses from the $700 billion loan program created in October 2008 are likely to reach around $117 billion, which is about a third of the losses that the government projected just last summer — an improved forecast that reflects the strength of the recovery on Wall Street, even as Main Street struggles.

The tax, which would be collected by the Internal Revenue Service, would amount to about $1.5 million for every $1 billion in bank assets subject to the fee. The administration is calling the tax a “financial crisis responsibility fee,” a name that suggests its political purpose as well as its fiscal implications.

But since word of the tax began circulating earlier in the week, the big banks have been objecting that taxpayers actually made money on the bailout loans to financial institutions. Many, including Goldman Sachs and JPMorgan Chase, have repaid their federal funds with interest and the government also has made money in selling the banks’ warrants that it held as collateral.

There’s politics behind this move, of course. From Naked Capitalism:

So let’s return to today’s story and the PR corner that Team Obama has painted itself in. It isn’t willing to do the UK thing and decry banker bonuses as irresponsible and unwarranted. It had Kenneth Feinberg, the pay czar, take a few scalps, but it was clear the Adminsitration had no intention of challenging the financial industry’s right to loot and pillage. It isn’t even willing to say the profits are due almost entirely to subsidies, hence a windfall profits tax (presumably one focused on capital markets operations, that’s where the real juice is) is in order. Heavens, that might lead chump investors to question bank valuations and sell stocks! Horrors, can’t have prices that reflect fundamentals when the Administration has been pointing to the improvement in the financial markets as proof its policies are working.

So the finesse is now to admit, in a reversal of its recent posturing, that yes Virginia, the TARP is losing money (this is the first time they have admitted the obvious). So that means banks need to pony up more for the cost of their rescue. Of course, we omit the complicating factor that AIG has been the biggest black hole, that the deal was retraded four times (or is it five now, I am losing track), and some money flowed through AIG to foreign banks like Societe Generale and Deutsche Bank, who will not participate in this little levy.

Notice how this finesse keeps the focus on the TARP, the program the public already hates, and diverts attention from the man-behind-the-curtain stuff the Fed has been up to, or the FDIC guarantees on bond issued by the likes of Goldman.

But the tax might also actually be a useful government remedy, as hard to believe as that is. Barry Ritholz explains how, besides closing the national deficit, the bank tax could solve the Too Big to Fail 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 — its 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.

These jumbo firms are the ones that can and will bankrupt the FDIC; They are the ones that put the entire system at risk. The bailouts reduced competition for them, and allowed a concentration of power that has been unprecedented.

If our broken Congress cannot regulate the Too-Big-To-Fail banks, at the very least, we can tax the hell out of them.

If the government added more bank regulations to this move, it might send a message that it’s serious about financial reform.