White House Seeks Bank Tax to Fund Bailout

123jump.com Staff
14 Jan, 2010
New York City

President Obama unveiled new fee on banks and financial institutions to recoup losses used in the TARP bailout. The President using strong language and sharp focus on compensation practices and risk taking behavior vowed to recover $120 billion over twelve years.

[R]4:40 PM New York – President Obama unveiled new fee on banks and financial institutions to recoup losses used in the TARP bailout. The President using strong language and sharp focus on compensation practices and risk taking behavior vowed to recover $120 billion over twelve years.[/R]

Political rhetoric on banks notched up to its highest level with the White House proposing a tax to recover taxpayer funds.

President Barack Obama using toughest language heard so far focused sharply on the compensation practices in the industry.

The President proposed tax on fifty largest banks, insurance and brokerage firms with more than $50 billion in assets that will start from June 30 and hopes to raise $90 billion over ten years and may raise as much as $117 billion over twelve years.

President is deeply aware of the industry’s opposition to the added tax but it feels strongly that people who created the crisis should take responsibility and behave with respect.

President said in his remarks at the White House, “The financial industry has even launched a massive lobbying campaign, locking arms with the opposition party, to stand in the way of reforms to prevent another crisis. That, too, unfortunately, is business as usual.”

The administration named the tax, Financial Crisis Responsibility Fee, on the industry to recover the TARP funds that bailed out banks, auto companies and housing lending agencies.

If enacted into legislation, the fee would be approximately 15 basis points or 0.15% of liabilities, meaning capital at risk at lending institutions. The capital that will be taxed will be calculated after deducting from total assets Tier 1 capital and excluding FDIC insured deposits or insurance policy reserves for insurance companies.

The fee will be collected by the Internal Revenue Service.

The White House did not name the institutions but the 50 firms are expected to include 35 domestic and between 10 and 15 American subsidiaries of foreign companies.

AIG, JP Morgan Chase, Goldman Sachs, Bank of America, Citigroup, Morgan Stanley, General Electric and subsidiaries of HSBC, Deutsche Bank and Barclays are widely expected to be on the list.

Fannie Mae and Freddie Mac are not included on the list because the administration believes that is not in the best interest of taxpayers.

Top ten firms are expected to pay nearly 60% of total fees.

All banks have repaid TARP funds with interest to the government except Citigroup but that is not enough according to the President. Mr. Obama said that the new tax is not to punish Wall Street to prevent excessive risk taking that caused the financial crisis in the first place.

The legislation created at the time by the Bush Administration has given till 2013 to recover all funds under the TARP but that Obama administration sees no need to wait.

Populous anger on the Main Street is growing with a belief that the banks that caused the crisis are the one that are benefiting at the expense of small businesses and individuals.

Small businesses are facing difficult time with loan approval and unemployment is hovering near 10% and yet most bank executives are rewarded with large bonuses as the industry resurges.

The industry that caused the Great Recession, in the eyes of the administration and people should take responsibilities for its actions. Banks and brokerages including Goldman Sachs benefited when Fed bailed out AIG with $85 billion and paid in full for the credit default swaps obligations.

Wall Street has never been popular with voters but the surge in unemployment and the return of short term trading and engaging in risky bets has not escaped the notice of administration.

To complement the White House announcement House Democrats introduced a bill that will slap 50% tax on bonuses paid in 2010.

President’s proposal is facing stiff opposition from the banking industry but the levy only on large institution is likely to divide the industry. Small banks and community banks are likely to benefit from the travails of large banks and will escape the new levy.

However, the industry lobby group was quick to oppose the announcement.

“This tax is strictly political,” said president of the Financial Services Roundtable and the former Republican congressman.

Chief executive of JP Morgan Jamie Dimon suggested at a public hearing yesterday that all management pass on increase in taxes to customers.

Mr. Obama noted in his statement, when we see reports of firms once again engaging in risky bets to reap quick rewards, when we see a return to compensation practices that seem not to reflect what the country has been through, all that looks like business as usual to me.”