Large Wall Street bonuses spark talk of new levy on financial industry
As Wall Street prepares to pay rich bonuses once again, Obama administration officials are considering a new tax on the financial industry -- a move that could temper resentment over banking’s rapid recovery at a time when more than 15 million Americans remain out of work.
The $700-billion federal bailout approved in late 2008 saved the nation’s major banks from near-certain collapse. Now the White House is considering a fee on financial institutions as one way to help recoup any losses from the bailout fund, according to a senior administration official.
In Congress, meanwhile, some lawmakers are weighing a new tax on bonuses paid to Wall Street traders and executives. Another proposal would impose new fees on stock transactions -- a tax that would reap the most from large banks, hedge funds and other institutions with huge trading operations.
Washington’s resolve in finding a way to pull cash from overstuffed Wall Street wallets stems in large part from fear of a public backlash over multimillion-dollar bonuses at a time when Main Street still suffers with 10% unemployment and the federal government ails from record budget deficits.
Reality about the economy differs depending on whether “you talk to somebody that is in line for a huge cash bonus at a Wall Street firm and a small business on Main Street that’s trying to get a loan,” White House Press Secretary Robert Gibbs said.
President Obama, he said, continues to get “visibly angry” when discussing large Wall Street bonuses.
But all the main ideas for new fees or taxes on the industry have potential problems. Among the concerns are that the measures would stunt the anemic economic recovery and that pay restrictions could be circumvented by clever industry tactics, as happened with past government attempts to rein in compensation.
“I fully understand why the public is very, very mad, and it’s appropriate to be mad at the bankers. The problem is the things that would be truly emotionally satisfying are almost always bad policy,” said Douglas Elliott, an economics fellow at the Brookings Institution think tank and a former investment banker.
“We could go and do something that could really scorch the bankers. But it could cause people to move out of the banks and go work for hedge funds,” Elliott said. “Anything you can come up with, there are a fair number of negatives associated with it.”
But the administration plans to try, even as Goldman Sachs Group Inc., JPMorgan Chase & Co. and other big recipients of bailout money are set to announce billions of dollars in bonuses this month after making huge profits last year.
Some sort of levy on banks could be in the administration’s proposed budget for the 2011 fiscal year, said the senior official, who spoke on condition of anonymity because plans are not final.
“The president has made a commitment to the American people that he will recoup their investment in the financial industry,” the official said. “While we have made great progress in recouping a large portion of the investment, consistent with the law, the president will propose a way to recoup additional funds, and one of the options is a levy on financial institutions.”
The law creating the $700-billion Troubled Asset Relief Program requires that the government come up with a plan to recoup any losses from the industry so the fund doesn’t increase the federal deficit or overall U.S. debt.
But such a plan is not called for until October 2013 -- five years after the fund’s creation -- when the White House is supposed to prepare a report for Congress about how much is left in the fund.
Although most of the large banks that received TARP money have already repaid the government, other recipients may never fully repay their debt. The Obama administration estimates that TARP will lose about $141 billion over the next 10 years, or about $200 billion less than projected in August.
After repayment announcements by Wells Fargo & Co. and Citigroup Inc. last month, Treasury Secretary Timothy F. Geithner said the administration was headed toward “earning a healthy profit” on TARP investments in banks.
The expected losses would come from large investments in giant insurer American International Group Inc., automakers General Motors Co. and Chrysler, and programs such as the administration’s TARP-funded initiative to encourage banks to modify home mortgages to reduce foreclosures.
With banks returning their money more quickly than anticipated, Congress and the administration should accelerate their efforts to recover any broader TARP shortfalls from the banking industry, said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.
“The industry is in better shape than many people thought,” said Frank, who has spoken with Geithner about a levy. “Those financial institutions that are spewing bonuses out are going to look pretty implausible saying they can’t afford it.”
But officials from the banking industry said hitting them with a new tax, on top of a total of $45 billion in additional fees to rebuild the federal fund that insures bank deposits, could hinder the economic recovery.
“We just had two meetings with the president where bankers were urged to lend more, and to lend more means we need to be able to raise capital,” said Edward L. Yingling, president of the American Bankers Assn. “To take more from the industry would just basically undermine our ability to lend.”
Yingling also noted that the government expects to make a profit on the TARP programs that funneled money to banks.
Some in Congress, along with the AFL-CIO, want to place a small tax on each stock transaction as a way of recovering money from large financial institutions that do large amounts of trading. The administration does not support such a move, but Congress could press ahead even though industry officials said the tax could hurt people who invest in 401(k) retirement plans.
“A transaction tax will hit average Americans and is easy to avoid by moving the transaction overseas,” said Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents large firms.
Another idea Congress might reconsider is a tax specifically on large Wall Street bonuses. After the public uproar over proposed AIG bonuses for those in the unit that helped bring down the insurer, the House last year approved a 90% tax on bonuses to employees at companies receiving large bailout funds. The legislation died in the Senate, however, amid concerns by Obama and senators about using the tax code to punish people.
Meantime, Wall Street firms have proved adept at finding ways around taxes and other restrictions on executive compensation. For example, a 1993 law that limited corporate tax deductions on salaries of more than $1 million led to a surge in using stock options, which sent overall compensation soaring.
And such a tax would not necessarily help generate money for the federal government, said Elliott, the former investment banker.
“Let’s say that all the banks decided they would just cut back bonuses sharply. All that means is that you transfer money over to the bank shareholders,” he said. “It’s not clear to me that the shareholders are all that worthy compared to the management.”
Elliott said a fee on banks to recoup any losses from TARP could work if it were designed correctly.
“If we feel that the banks got too good a deal, it’s easy enough to charge a fee or a tax in the future,” he said, saying a small levy could be assessed based on bank assets or income.
“If we do it, it ought to be moderate and spread over a number of years, because the financial sector is an important part of our recovery and we don’t want to set it back too much.”