Obama proposes to tax largest financial firms
In proposing a new tax on large financial firms, President Obama sent a clear message to bank executives about responsibility for the government’s $117 billion in projected bailout losses: The bucks stop with you.
“We want our money back, and we’re going to get it,” Obama said in a short, sharply worded White House speech Thursday. “If these companies are in good enough shape to afford massive bonuses, they surely are in good enough shape to afford to pay back every penny to taxpayers.”
The move would generate about $9 billion a year for at least 10 years to make up for losses in the $700-billion Troubled Asset Relief Program and, in doing so, restrain the soaring federal budget deficit. The measure also could provide political benefits for the White House, a desire evident in the name Obama gave to the proposed tax -- the Financial Crisis Responsibility Fee.
The attempt to recoup taxpayer money from the largest financial institutions could mark a strong populist distinction in a midterm election year between Democrats, who have railed against Wall Street’s return to its free-spending ways, and Republicans, who face being branded as favoring the big banks if they fight the tax, as they have done with the administration’s attempts to overhaul financial regulations.
Obama laid out battle points both legislatively and politically.
“We cannot go back to business as usual,” he said. “And 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. 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.”
Democrats quickly picked up the theme. House Speaker Nancy Pelosi and some key party lawmakers all endorsed the idea. Some Democrats also pushed legislation that would go further by slapping a special tax on large bonuses.
And in Massachusetts, where a surprisingly close special election next week to fill former Sen. Ted Kennedy’s seat threatens to derail Obama’s healthcare legislation, the Democratic candidate immediately challenged her Republican opponent to support the bank tax.
“Now is the time for Scott Brown to tell us what side he’s on, and who he wants to fight for,” said Massachusetts Atty. Gen. Martha Coakley, who stressed her support for holding “the largest Wall Street firms accountable for their abuses that caused millions of people to lose their jobs.”
But Brown, a state senator, like some other Republicans, was undaunted. A spokesman said he opposes raising taxes “in the midst of a severe recession.” And other Republican opponents of the tax said it was likely to restrict lending when many businesses are desperate for loans and would ultimately be passed on to already over-taxed consumers.
“This proposed tax increase is yet another job-killing policy that makes little economic sense,” Sen. John Cornyn (R-Texas) said.
The U.S. Chamber of Commerce called the tax “misguided.” And lobbyists for large financial institutions called it unfair and potentially damaging to the economy.
“Two-thirds of the TARP investment to banks has already been paid with a handsome profit to the taxpayers,” said Rob Nichols, president of the Financial Services Forum, a trade group of the chief executives of 18 of the largest financial institutions. “We should just be very cautious about advancing any public policy -- a tax, a fee or otherwise -- that would potentially impair lending or credit availability at a time of economic fragility.”
The new fee would have to be approved by Congress, and could run into opposition from moderate Democrats as well as Republicans.
The tax would hit about 50 of the nation’s largest financial institutions, administration officials said. The tax would be an annual 0.15% fee on a company’s liabilities, excluding domestic deposits, and would be assessed on banks, insurance companies and other financial firms with at least $50 billion in assets.
A fee based on liabilities would help discourage large financial institutions from taking on too much risk, administration officials said.
About 60% of the fee would be raised from the 10 largest financial firms, among them some of the biggest names from the financial crisis, including Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley.
The levy could make the banks subject to it less competitive with smaller rivals that wouldn’t have to pay it, said Bert Ely, an independent banking consultant, predicting the affected banks would work hard to get around the tax.
“I think this is 98% driven by politics,” he said.
The measure, for example, could encourage banks to shrink their balance sheets, including their liabilities, by selling more loans in the form of securities. That practice, known as securitization, was popular during the credit boom and implicated in the financial meltdown. The markets for such securities have largely remained dormant since the credit crisis except where the Federal Reserve has stepped in to prop them up.
Most of the large recipients of bailout money have repaid all of their infusions, and the Treasury Department has projected a profit from the component of TARP that injected money into banks because of dividends and stock warrants received by the government.
The tax, which would begin June 30, would be assessed on firms that have repaid their money and on some that did not get any bailout funds. It 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 TARP losses. Such a fee would be logistically difficult to impose on a manufacturing company, according to a senior administration official.
The $117 billion in projected TARP losses include about $50 billion in bailout money that the administration is spending on its plan to offer incentives to banks to modify home mortgages to reduce foreclosures.
“It is thus possible that legislation may result in financial institutions being charged for losses made on investments in two automobile companies and on foreclosure mitigation efforts,” said a report released Thursday by the Congressional Oversight Panel monitoring TARP. “On the other hand, it may be argued that many of the financial institutions that received TARP funds would not have survived absent such capital injections, or, even if they themselves were not short of capital, would have been vulnerable had other giants in the industry fallen, and therefore asking for these institutions to contribute to an overall TARP shortfall is appropriate.”
Obama said bailing out banks, which began under the Bush administration, was “as necessary as it was unfortunate” because of the vital role large financial institutions play in the economy. Even though most of the firms have repaid the money, Obama said that’s not good enough.
“My commitment is to recover every single dime the American people are owed,” he said. “And my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people, folks who have not been made whole and who continue to face real hardship in this recession.”
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