President Obama plans to propose today a new tax on about 50 of the nation’s largest financial institutions to recoup about $100 billion in expected losses on infusions of federal bailout money.
The expected proposal comes a day after the heads of four giant banks admitted making mistakes and expressed regret for the financial crisis before a special panel investigating the causes of the massive meltdown.
The new “financial crisis responsibility fee,” which must be approved by Congress, would generate about $9 billion a year for at least 10 years, said a senior administration official who spoke on condition of anonymity because the plan had not been formally unveiled. The annual tax -- equal to 0.15% of a company’s liabilities excluding insured deposits -- would be assessed on banks, insurance companies and other financial firms with at least $50 billion in assets.
The levy, which would take effect June 30, would hit many banks that have repaid all of their infusions from the $700-billion bailout fund -- and some that never received any of that money. Notably, the fee would not be assessed on automakers General Motors Co. and Chrysler Group, which have received about $64 billion in bailout money and are projected to account for a large share of the losses. Such a fee would be logistically difficult to impose on a manufacturing company, the administration official said.
Large banks, anticipating the proposal, have complained that a new tax on them to cover losses from the Troubled Asset Relief Program would be unfair not only because most of them have repaid their TARP money but also because the Treasury Department projects a profit on its bailout investments in banks after counting dividends they paid to the government as well as increases in the value of stock warrants the government received when making the infusions.
“I think it would be very hard to have the industry pay for the auto companies,” Jamie Dimon, chief executive of JPMorgan Chase & Co., said Wednesday. “At some point, you’ve got to be fair.”
But the Obama administration contends it’s only fair to ask that firms that helped cause the crisis and have benefited from the bailouts cover any losses from the fund -- especially now that many of the largest banks are again making large profits and plan to award millions of dollars in bonuses.
“It is our belief that major financial institutions were both significant causes of the historic financial crisis that has inflicted widespread harm on the economy and have been beneficiaries of extraordinary efforts to stabilize the economy,” the senior administration official said. “It is in many ways offensive . . . to suggest that they can today afford excessive, often outlandish bonuses for their top executives but cannot afford to make whole the taxpayers who put forward public policies that they have benefited from.”
The administration’s move, which Obama is expected to announce this morning, reflects continued anger over the behavior of large Wall Street firms in helping trigger the crisis and the return of normalcy to the financial industry while many average Americans are still struggling.
That outrage also has prompted Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to set hearings this month on executive compensation and on possibly increasing taxes on large bonuses.
“The question of compensation for people in the financial industry is a legitimate cause of concern in the country as a whole, and we are going to address it,” Frank told reporters Wednesday.
“There may be, in some of these financial institutions, people capable of playing Major League Baseball. I’m not aware of any,” he said. “But absent that, I don’t know where they would go to get comparable forms of compensation.”
Dimon and executives from Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. largely defended their compensation practices Wednesday at the first hearing of the Financial Crisis Inquiry Commission, but said they understood the public’s anger at their industry.
The executives didn’t accept direct blame for causing the financial crisis. They said their firms were among the many players, from financial giants to average consumers, who took on too much risk in the boom of the last decade, believing the good times would not end.
“We did eat our own cooking, and we choked on it,” John Mack, chairman of Morgan Stanley, said about large bets the industry placed on a continued rise in the housing market.
“Somehow we just missed that home prices don’t go up forever,” Dimon told the panel in admitting that his company never tested its exposure to a 40% drop in home prices even though it tested almost every other market scenario.
Goldman Sachs CEO Lloyd Blankfein and Brian Moynihan, the new CEO of Bank of America, were the other initial witnesses as the congressionally appointed commission began the public portion of its yearlong investigation.
“We’re after the truth, the hard facts,” Phil Angelides, the commission’s chairman, said in kicking off the first two days of hearings. “People are angry. . . . They have a right to be. If we ignore history, we’re doomed to bail it out again.”
Angelides, a former California state treasurer and 2006 Democratic nominee for governor, swore in the four executives and told them the commission would use its subpoena power when necessary -- unneeded Wednesday because the witnesses testified voluntarily -- and refer any wrongdoing it uncovered to the authorities.
The questioning was contentious at times, and Angelides was the most aggressive of the 10 panel members. He wondered whether the crisis was “purely a perfect storm” or “a man-made perfect storm in which the clouds were seeded.”
The answers, which the commission must provide to Congress by Dec. 15, will be difficult to determine, Peter J. Solomon, a New York investment banker, told the panel in the second session later in the day.
“There’s no silver bullet here,” he said of the cause of the crisis. “If you listed all the villains in this tale, you wouldn’t get to the plot.”
Angelides focused his questioning on Blankfein, whose firm has been criticized for selling securities containing subprime mortgages and then shorting those same investments to hedge the firm’s risk.
Blankfein said the practice was “improper” and that “we regret the consequence that people may have lost money.” But he also defended the actions, saying they were what “market maker” firms such as Goldman do in creating a mechanism to trade shares and in minimizing the risks.
“I’m just going to be blunt with you,” Angelides responded. “It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy” on the person who buys the car.
The sparring between the two was the most contentious part of the first three-hour session. Blankfein said it was difficult to look at risk in hindsight after a major crisis. He noted that a person’s assessment of the risk of a hurricane was greater after a season in which four major hurricanes hit.
“Acts of God are exempt,” Angelides shot back. “These were acts of men and women.”
Blankfein, Mack and Dimon -- all of whom headed major companies as the financial crisis approached -- testified on Capitol Hill for the second time since the crisis began.
They said Wednesday that poor government regulation played a role in the crisis and pressed for changes, including new oversight of risk in the broader financial system and a way for large firms to fail without seriously damaging the economy. The Obama administration has proposed such changes in an overhaul of the financial regulatory system now moving through Congress.
“We cannot and should not take risk out of the system; that’s what drives the engine of our capitalist economy,” Mack said. “But no firm should be too big to fail.”
Dimon said he wanted to be clear that he was not blaming regulators, but the companies, for their problems. “I blame the management teams 100% and no one else,” he said.
JPMorgan Chase should have been more diligent about lending standards and about financial firms becoming over-reliant on short-term financing, Dimon said. In addition, “excessive leverage, even from consumers, pervaded the system” leading up to the crisis, he said.
Moynihan, who took over Bank of America this year, said he understood the public’s anger and was grateful for the $45 billion in taxpayer bailout money the company had received. He noted the firm had repaid the entire amount, along with $3 billion in dividends and other payments. The other three companies also have repaid their bailout money.
Still, Moynihan said: “We as managers need to run our companies so this never happens again.”
Blankfein credited government support as being crucial in stabilizing the financial system -- “and we benefited from it.” But he did not agree with Angelides that Goldman only survived because of the aid.
“I can’t stand here and tell you what would have happened . . . but we were going to bed every night with more risk than any responsible manager should want to have either for your business or for the system as a whole,” he said.
The commission was created by Congress last year and patterned on the bipartisan panel that investigated the causes of the Sept. 11, 2001, terrorist attacks. Congress also launched a similar inquiry, known as the Pecora Commission, after the Great Depression, and those findings led to major financial reforms.
Angelides was appointed by congressional Democratic leaders to head the panel. Republicans chose former Central Valley Rep. Bill Thomas, a onetime chairman of the House Ways and Means Committee, as the vice chairman. The panel has six Democratic appointees and four Republicans.
BEGIN TEXT OF INFOBOX
“Somehow we just missed that home prices don’t go up forever.”
-- Jamie Dimon, chief executive of JPMorgan Chase & Co.
“We did eat our own cooking, and we choked on it.”
-- John Mack, chairman of Morgan Stanley
“Over the course of the crisis, we as an industry caused a lot of damage. And it has been clear how the poor business judgments we have made have affected Main Street.”
-- Brian Moynihan, chief executive of Bank of America Corp.
“We talked ourselves into a place of complacency which, . . . after these events, will not
happen again in my lifetime, as far as I’m concerned.”
-- Lloyd Blankfein, chief executive of Goldman Sachs Group Inc.