In about a half an hour or so, President Obama is supposed to unveil what the White House is calling the "financial crisis responsibility fee."  It is part penalty, part tax, part bizarre pound of flesh.

Here's the gist from the WSJ:  "Under the proposal, a 0.15% tax would be levied on liabilities. The tax would apply to bank holding companies, thrifts, insurance companies that own financial arms and broker dealers with at least $50 billion in assets that received assistance under TARP, the FDIC's temporary loan program or other crisis efforts. "  The estimated number of payors is around 50, with 35 being U.S. companies and the rest being U.S. subsidiaries of foreign companies.  Though most are large banks, other conglomerates with lending arms, like General Electric, who benefited from federal government intervention will be swept up into the tax as well.

So, how is this .15% tax calculated?  Per the administration:  "The tax would be levied on total assets, minus a type of capital considered high quailty, such as common stock, and disclosed and retained earnings. FDIC-covered deposits and insurance policy reserves would be untaxed because such assets are already subject to federal fees."  Over 10 years, the tax is expected to collect $90 billion.  So, the more you look like a retail bank, with customer deposits, the less fee you will pay.  The more you lend, which I thought we were trying to get banks to do these days, the more fee you will pay.

Interestingly, and what seems to me to be very controversially, General Motors and Chrysler, who have lending arms and who benefited form federal government intervention, are exempt.  The purported reason is that these poor automobile companies, who otherwise have fabulous business plans, were sunk in part because of the risky behavior of the other banks.  I'd like to see someone say that with a straight face.

So, which part you hate about the financial crisis responsibility fee depends on what you think the fee is for.  First, it could be a penalty for bad behavior.  We often fine, either criminally or civilly, what we consider bad behavior, but we generally have statutes, either criminal or civil, that lay out what that bad behavior is and what the monetary penalty for that behavior could be.  So, if you park illegally, speed in a construction zone, violate the securities laws or commit a misdemeanor, or penalties for those behaviors are all written down in something we call "the law."  This is a strange after-the-fact, we-never-thought-about-this-but-if-we-did-we-would-have-prohibited-it-by-statute, but we-can't-really-articulate-what-behavior-was-bad penalty.  What exactly did each of these firms with $50 billion in assets that received assistance do wrong?  Can you articulate it well enough to draft a law prohibiting it?  I didn't think so.

Second, it could be a tax meant to nudge these big firms into having more financially conservative business practices.  Will it do that?  Are there better ways to do that?  The problem is it disincentivizes normal leverage.  But most people agree that ordinary leverage did not cause this crisis.  The strange double-down nature of contingent liabilities that correlate to other liabilities was the problem.  (See Richard Squire, Shareholder Opportunism in a World of Risky Debt, 123 Harv. L. Rev. (forthcoming 2010) (discussing this correlated contingent liability problem)).

Third, it could be a necessary tax to recoup TARP costs.  Is this really the best way to do it?  Since costs are less than a third of what was estimated, is the tax necessary?  Aren't there other actors that contributed to the need for TARP funding?  If much of the unreimbursed TARP costs are for auto bailouts and homeowner refinance plans, can we really say that a bank buying too many mortgage backed securities or selling too many credit default swaps (or both at the same time) are the reason that homeowners couldn't pay their ARM mortgages?  Because if no bank bought mortgage-backed securities or sold credit default swaps, the same situation of ARM mortgage holders not being able to refinance could occur.

Fourth, it may just be a spite tax.  Lots of Americans are in worse financial shape than they were two years ago, but the Wall Street guys have bounced back.  This is not fair, so we should tax them.  Eighteen months ago, we were saying that a robust financial industry was crucial to a robust U.S. economy.  Shouldn't we be happy?

Stay tuned!

Financial Crisis | Bookmark

TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8345157d569e20120a7d2ffad970b

Links to weblogs that reference Pre-Gaming the "Financial Crisis Responsibility Fee":