Obama wants a 0.15% annual levy on the total liabilities (minus insured deposits, on which a fee is already payable) of the 50 top financial institutions. The aim is to punish banks dependent on funds borrowed from the wholesale markets. The tax will raise $9bn a year (5.4 per cent of peak profits, much more today) for 10 years to recoup the cost of Tarp bailouts.
The 500 biggest banks in the US have $9,423bn in liabilities. After subtracting $3,626bn of insured deposits, that leaves $5,805bn of liabilities – most of these are accounted for by the top 50 players. Goldman Sachs and Morgan Stanley will pay little because their balance sheets are smaller than the top four banks. JP Morgan would pay the most, almost $2bn, because it is the biggest. Despite having fewer liabilities, Citigroup would pay more than Bank of America.
The plan is full of holes. The firms that will be hit – and pick up the bill for the Tarp – will be banks that have already reimbursed their own Tarp loans at a profit for the taxpayer or that were not bailed out at all; those that have truly cost a fortune in handouts (notably General Motors) will be exempt. It is unclear what will happen to AIG, one of the biggest Tarp loss-makers. JP Morgan Chase was America’s best run large financial institution; it is now being hit the hardest. Yet other well-run but smaller financial firms won’t pay anything.
Although Obama’s tax is being levied on banks’ liabilities, it will also encourage a reduction in assets, in particular loans. If it were that easy to increase deposits, everybody would already have done so; firms know they were wrong to depend so much on the wholesale markets (an idiotic dependency, one must add, that was signed-off by regulators, governments, international rules, investors and most economists). Since peaking in October 2008, net loans and leases at US commercial banks have slumped 8.6 per cent. Debt must return to more sustainable levels. But this must be managed carefully; this latest tax could unthinkingly precipitate a sharp contraction in credit and could wreak the recovery.
In the US, banks pay a fee for retail deposits that are insured in case the bank goes bust. This is a good thing. Many believe the same should apply to investment banks: if they are insured by the state against going bust, then they should pay for this privilege. I disagree: bad banks should fear bankruptcy, not expect to be bailed out – whether they have paid for the service or not. In any case, this amounts to a retrospective fee, which is not right.
Fannie Mae and Freddie Mac – always state-supported – will end up costing the taxpayer a fortune and behaved incompetently during the bubble. But guess what – they are exempt from the tax. The hypocrisy is horrifying: their politically-encouraged subsidies for subprime were one of the driving causes of the bubble. As ever, politicians help their friends and kick their enemies.
Much was horribly wrong with the old system. Yet rage and envy are never a good way to sort out problems. We need calmly thought-out reforms to restore individual responsibility and ensure no more bailouts. What a tragedy even Obama prefers populism to reason.