On Thursday morning, President Obama and his economic advisors unveiled the “Financial Crisis Responsibility Fee” in an effort to retroactively punish the nation’s largest banks for risky decisions which nearly brought the US and global economy to ruins. This new tax is expected to raise about $90 billion over the next ten years (or longer if necessary) and targets the largest Wall Street banks. The ultimate target of this latest policy gambit–in President Obama’s own words—are “the obscene bonuses at the very firms who owe their continued existence to the American people.” Rather than directly taxing the offending bonuses themselves, this new tax will be levied on the dollar amount of liabilities or risk that larger banks carry on their balance sheets. It is estimated that the top ten largest financial institutions will pay 60% of the fees and that no bank with less than $50 billion in assets would be subject to the new tax.
The traditional media as well as the blogosphere have begun to digest the new potential tax, and it appears that the vast majority see this as a troubling proposal. Here are some points which jump out at us:
- President Obama has acknowledged on many occasions the need to spur lending to help boost small business in particular. Small business is the primary driver of job creation, and joblessness is the most pressing economic problem the nation faces today. As recently as December, Obama invited financial “heavyweights” to Washington to discuss ways to increase business lending, which is still a fraction of its pre-crisis level. Does the President really believe that levying a new, punitive tax burden of $90 – $120 million on banks will make them more inclined to lend?
- The tax is designed to discourage the culture of excess (risk and bonuses) on Wall Street. However, critics argue that banks, brokers and insurance companies will simply pass along these mew fees their customers (more below). Banks were urged to look to their bonus pools as a source of funds for cash to pay any risk tax, but that is wishful thinking on the part of the administration. Any such fee would become a cost of doing business, and would only lead to greater fees for customers. Just look at the recent bonus tax instituted recently in Britain. Financial institutions preferred to pay the taxes out of the bank’s accounts rather than risk losing their upper level talent to an aggressive competitor.
- The proposal targets many banks which have already paid back their TARP loans in full plus interest. Even though taking TARP funds was not optional, banks are now to be punished for taking the money. Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and many others have attempted to get back to business as usual by throwing off the yoke of TARP, but they will now be forced to pay for the other recipients of TARP who will not be able to pay off their debts, in particular General Motors, GMAC, and Chrysler. An administration official, in a weak defensive of this reality, said that “U.S. auto makers collapsed in part because of a financial crisis of the banks’ making”.
Whether or not this tax actually makes it into law–which is certainly in doubt–philosophically speaking, this would set a precedent of taxing businesses for their mistakes, and is a further assault on our free market system. By necessity, capitalist ventures are driven by risk and financial institutions make their living by assessing, managing and profiting from risk. A more logical and simple way to safeguard the economy from excessive systemic risk in the future–and one that is favored by many policy-makers including the President’s economic advisor, Paul Volker–would be to restore the Glass-Steagall Act or something similar. Separating the higher risk investment side of banks from their commercial banking operations, would reduce the systemic risk posed to our economy going forward, but this is a discussion for another time.
It could all be much ado about nothing and simply political grandstanding designed to buttress Democrats flagging popularity with the electorate but this proposal has the ability to do too much damage for us not take a stand. At Ockham, we are concerned that the economy is still vulnerable to a double-dip recession and the President is courting disaster pursuing a number of programs which would be harmful to businesses if enacted. The “Financial Crisis Responsibility Fee” strikes us as a terrible idea which will further burden a struggling economy at a very inopportune time.
In closing, Oppenheimer analysts Chris Kotowski did some quick calculations as to the effect of the proposal’s effect on some of the largest banks. According to his analysis, Morgan Stanley (MS) would be the hardest hit with 11.3% haircut to 2011 EPS, and Citi (C) is not far behind with a 9.5% hit. However, he concludes that investors need not worry:
“However, we don’t believe that the fee will run directly to the bottom line. We view it as effectively an increase in the wholesale cost of funds that will be passed through to the customers that utilize these institutions’ balance sheets.” — Chris Kotowski
