A Subtle Hypocrisy

This past Thursday President Barack Obama announced his plans to levy a Financial Crisis Responsibility Fee on our nation’s largest banks.  In his announcement he sold his proposed “fee” as a mechanism to repay taxpayers for the cost of the TARP bailout.  In his address President Obama levied a clear ultimatum on Wall Street stating:

“We want our money back, and we’re going to get it.”

Obama also took the opportunity to bash banks for their “obscene bonuses,” in a clear attempt to capitalize on frustrations with the high salaries bank executive have received during the financial meltdown.  This proposed tax on banks, let’s call it what it is, would remain in place for 10 years and is expected to raise almost 90 billion dollars which would be used to “repay” taxpayers for an anticipated 117 billion dollar TARP loss.  According to the Wall Street Journal, the tax would have its greatest impact on 6-10  of our nation’s largest banks including  Citigroup, JP Morgan, Bank of America, Wells Fargo, and Goldman Sachs.  Coincidentally, it would exclude other recipients of bailout funding like GM, Chrysler, and AIG.  In this plan, Obama would levy a .15% tax against certain types of bank assets which are referred to as “covered liabilities.”

In a nutshell here is how the tax would work (taken from WSJ Fact Sheet):

Covered Liabilities =  Total Assets – Tier 1 capital – FDIC-assessed deposits (and/or an adjustment for insurance liabilities covered by state guarantee funds)

What this means is that the government would take a bank’s total reported assets subtract any Tier 1 capital assets (Common Stock and Cash Reserves) and Federally insured deposits and tax the remainder by .15%.

Here is a good example provided by the WSJ:

In this example, it is clear to see that the targets of this tax are the “risky” non-insured investments that banks claim as assets. It is also clear from this calculation, that the amount of tax paid by Bank X is a proportionately very small percentage of their total assets.  According to the New York Times this would roughly amount to about a 1.5 million dollar tax on every 1 billion dollars of assets that a bank holds. Additionally,  Betsy Graseck from Morgan Stanley, estimates that this tax would only shave about 5% off the bottom line of these banking giants.  So, given that this is such a small and inconsequential tax on some of the world’s richest and greediest banks, you may well wonder what all the squabbling is about.  By all outward appearances, the Obama Administration is simply trying dissuade banks from spending taxpayer provided TARP funds foolishly. What could be more genuine than that?  Maybe so, but Head Muscle believes that there is a subtle hypocrisy at work here.  A hypocrisy that, once again, inserts government into the free market, sends mixed signals to big business, reeks of politics, and ultimately hurts the American taxpayer.  Let’s take a closer look:

Meddling with the Free Market - Even though the government refers to this new tax as a fee, in reality it is an insurance premium.  Paul Volcker all but admitted this at an Economic Club of New York luncheon this past Thursday. In his remarks Volcker noted:

“[The Fed] needs both the ability to identify problems in the financial sector and the instruments to deal with them. In acting as lender of last resort, it must know its counterparties and know them well.”

Volcker went on:

“The old question of institutions being too big to fail looms larger than ever.  Unless regulators are given a robust “resolution authority” to take over failing banks, all other proposed reforms in areas such as accounting rules and banks’ capital requirements “won’t provide the safeguards that we need.”

He then provided a medical analogy which likened not providing financial support to failing banks to a “Do not resuscitate” order.

“So, where is the hypocrisy here?” you might ask.  Simply put, the government first pressed banks to make more and more high risk loans through the now infamous Community Reinvestment Act. In response to the mortgage crisis, the government then gave failing institutions TARP funds to stabilize the cash hemorrhage.   Now, the government is asking for banks to not only pay the bailout money back, which they are doing with interest, but also to pay what amounts to an insurance premium for this continued service.  In short, the government played a significant role in bank failures, bailed them out, and is now asking for a fee for the service. What a fantastic business model!  Help create the crisis, save the wounded, and then charge them for the service.  This is hypocrisy at its finest.

The unintended consequence of doing this however, is that our government is now creating the expectation that, because banks are being forced to pay the fee, they will be entitled to future bailouts as well. This amounts to nothing less than a new taxpayer sponsored insurance program for the big banks. Instead of a “penalty” banks will look at this tax as a cost of doing business just like their FDIC premiums, and pass it along to the consumer – us.  In the end, it will impact executive bonuses no more than the FDIC premiums do. Banks, like all businesses, will pass whatever costs they can along so that they can continue to realize the profits that their stockholders expect. As a result, bonuses will continue to be at whatever level the market will tolerate. Ironically, this type of implied insurance could also reduce the competitiveness of smaller banks that are not afforded “too big to fail” status. Unlike the big guys, they will have to continue to operate within a much smaller asset base and will not be afforded a federal safety net in the event that their investments fail.  Truly a hypocritical double standard that favors the big guys and ignores more exposed small banks.

Sending Mixed Signals – The other problem with this tax is that it does not separate a bank’s loan inventory from its other taxable covered liabilities.  This means that, in addition to risky security investments,  banks could also be taxed on  loan inventories which are reported as assets.  Again, you have the government sending a mixed message here.  First, they passed the Community Reinvestment Act which in effect forced banks to make more loans, and now they are penalizing banks for having these loans on their books. Truly, this is a level of hypocrisy that only the likes of Barney Franks could cook up.  Again however, this amounts to another garbled message to lenders. “We want you to loan more, but we also want to penalize you for it.”  Sadly, the result of this mixed message could well be banks making fewer loans. This is nothing short of absurd, especially given that neither Fannie Mae, Freddie Mac, nor Barney Franks have been held to anything near the level of accountability that our nation’s banks have.

Politics as Usual - It is not difficult to find the political hypocrisy here either.  All one really needs to do is look at who is not subject to this new tax.  First and foremost, two of the biggest “non-bank” recipients of bailout funds were GM and Chrysler.  These two companies alone have received approximately 60 billion dollars in taxpayer funds and, unlike the banks, are not likely to pay it back. Yet, incomprehensibly, they are not subject to Obama’s proposed tax.  Instead, the banks will be expected to pay back the automaker’s share. How could this be?  Revealingly, since the restructuring of these companies, the UAW now owns an 18% chunk of GM and a whopping 55% chunk of Chrysler.  It should be no shock to anyone that these two union strongholds are receiving “get out of tax free” cards under Obama’s plan.  For those who would disagree and suggest that this is pure coincidence, HM would like to refer you to a recent article on health care from the Washington Examiner. It appears that union members will also be exempt from paying fines on “Cadillac health care plans” that the rest of us will potentially have to pay. In this article, the Examiner’s Chief Congressional Correspondent, Susan Ferrechio, points out that:

“Union workers enjoy some of the most extensive and costliest health benefits, and union officials complained their members would be unfairly burdened by a health care tax because their contracts cannot be changed quickly enough to avoid it… Union members also represent one of the biggest and most powerful Democratic constituencies and their support of any health care reform proposal is viewed as essential to getting a bill passed in Congress.”

Is this a coincidence or just blatant hypocrisy?  HM will let you decide.

AIG’s exclusion from the tax is much more straight forward however.  The government owns them.  Why on earth would the government tax themselves?  In this case, once again, we see a subtle hypocrisy.  Why would the government want to be held accountable for the types of investment and business practices that they are holding banks accountable for? Since when has the government played by its own rules? You really must laugh…right?

We All Get It in the End - So, if Obama is successful at passing this new bank tax, who will ultimately end up paying?  Will it be the “fat-cat” bank executives with their seven digit bonuses? Will it be Barney Franks for his foolish and politically one-sided policies or perhaps Fanny Mae and Freddy Mac?  Most certainly not.  It will be you and I. Banks, being private profit-based businesses, will continue to adapt their business models to ensure maximum returns to their stockholders.  This is not a crime, but rather good business. This new tax, like any other cost of doing business, will ultimately get passed to consumers in the form of higher interest rates on loans, reduced banking services, and possibly even the further reductions in new lending.  We will in essence be paying for this new “failure insurance” twice; once through our taxes and a second time through our loans and credit lines.  Either way, it will come our of our pocketbooks.  Some however, will still suggest that this tax that will actually result in banks making more loans and improving their business models to better support consumers.  For these people, I can only quote Republican Representative Jeb Hensarling of Texas:

“To think that banks will loan more money if you tax them is beyond economic ignorance.”

In conclusion. this bank tax, though “small” by comparison, is another reminder that the current administration believes it can, and should, play a greater role in our free enterprise system.  It believes that populism is more important than capitalism, and will use any opportunity it can to wrest more control over the private sector.   From decrying obscene bonuses to mandating regulations that it would never follow itself, the Obama Administration is sending the clear message to all Americans they are tightening their grip on our economic throats – like it or not.  Though not fatal in its own right, this tax proposal is a case study in government hypocrisy and will ultimately be a burden born by hard working Americans. The good news is that, if you are Barney Franks, none of this really applies to you.

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11 thoughts on “A Subtle Hypocrisy

  1. Good post. As for the we will get it in the end scenario I see that coming. Increased fees and “surcharges” if you happen to go over the FDIC insurance limit or if you have non-tier 1 accounts with the bank.

    It will then become part of bank business planning to work to manage that tax burden by limiting non-tier one accounts and accounts without FDIC limits. Unless of course they can pass these costs along to the consumer. Yes, more expensive lending!

    I agree that American’s should probably slow down on their debt growth. But a government constraint on it is not right it should be market based. The technocrats in Washington will never be able to manage the unintended consequences of all their actions!

  2. First things first:

    Cool graphic, that amply describes this scenario. Regulation has been around for some time now, and some of it to be expected and understandable.

    But this is just beyond the pale.

    Surely this latest crop of dolts knows that as with the impending (but still theoretical) carbon taxes looming, business cannot just “take one for the team” and absorb such hits.

    They will pass this onto consumers. Banks will be no exception, regulated to the very hilt, or not.

    No the end consumer gets popped twice. Once for the bailout that was needed to fix a mess that government had a large hand in, in the first place with the mechanics of getting the EZ-Credit push going, and next with increased fees.

    Remember when “consumer activist” groups screamed like banshees and stuck pigs when ATM fees started going up?

    But this, per some deep thinkers, is just fine and dandy. Surely they know where on the path to total subjugation of the economy to central command. The strategy being to muck with the wheels of commerce in such a way as to make Government the only answer.

    How convenient.

    • If only the average “citizen” would read and understand what you are saying here Wake. There would be a reawakening to rival the renaissance. Alas, this is just too much to think about for most folks….not that it is complex….it just takes time and effort.

      This is the mindset that has made government what it is and is making this tax possible.

      Sad….

  3. Populism makes this tax possible. So long as there are gads of people who think that corporations, merely because they are corporations, deserve their scorn, there will always be a constituency for these things.

    The financial arena is quickly becoming a strange Kabuki theater, where Democrats beat up Wall Street enough to get contributions from the public, and then cut sweetheart deals and find hidden niches where Wall Street barons can operate with impunity. I am far from being an anti-corporate radical, but I have absolutely zero patience for Goldman Sachs and other financial institutions making government capture a way of doing business.

    But that can’t be happening — there are no lobbyists in the Obama administration, right?

    • The irony with populism is that the proletariat will actually be the ones paying in the end. Talk about cutting off your nose to spite your face….

      The corruption and influence peddling in this industry is despicable, however the notion of taxing the companies to make life better for their consumers is simply absurd.

    • I agree with you here, Marque. I read a good article a while back (wish I had kept it) from a former member of the IMF who described banking and financial crises in the third world and stated how one of the primary problems in those situations was that the financial industry had too much sway in the government. This led to ultra-liberal “regulation” and implicit government backing of the financial system – which invariably precipitate crisis.

      The author brought this up b/c he said the same thing has happened to us in the US. There is a revolving door at the Treasury department of former investment bankers in high-level, key positions. And we all are aware of the implicit backing of the government in the awful subprime lending market (as well as the dubiously light regulations over loan origination that allowed people to borrow so much more than they could afford, etc.). The financial services industry is too closely linked with our government.

      I think it has gotten to the point where it is not pure capitalism, pure free markets anymore. How else would you explain TARP, etc.? Free markets over bankruptcy as the path for failed businesses and business models. What we have is government take-over and propping up and implicit backing- and in turn, banks handing out huge bonuses. The banks earnings are being bolstered this year by all the cheap money the government has flooded the markets with through quantitative easing and low interest rates. They reap the benefits of what is ultimately a tax-payer supported system. It’s actually rather sickening.

      I’m kind of making a meandering point here, but what I’m coming back to as I think the populist anger at Wall Street is justified- b/c I don’t think Wall Street has been playing by free-market rules all the time, based on their too-close ties with the government.

      Overall, though, I think the anger is rightly directed both at Wall Street and the government together.

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  5. Excellent post, Chuck. Economics is a subject that generally makes my head hurt, but you explain this issue very well.

    I would argue that this administration (and government, under Democratic rule) is beyond hypocrisy – which by definition requires selective disregard of ethical and moral behavior. These people apparently have abandoned all pretense of such precepts. Instead, they exercise blatant, overwhelming, overpowering corruption and arrogance with total disdain for public opinion.

    The seeming confusion and contradiction of their actions is perfectly understandable if you keep in mind that their goal is destruction of the American economy and free markets so that they can then impose the socialist tyranny that they have been building toward for the last century.

  6. I agree this tax is kind of pointless- and that it will be passed on to us.

    But one place where I am finding myself diverging from some within the conservative movement is that I am beginning to be persuaded that a strong system of financial regulation is fundamental to a proper functioning financial industry.

    Previously, I’ve been for lightening regulation to the largest degree possible- thinking that this brought down the cost of capital and maximized growth potential. However,I’ve been reading lately that there is rather overwhelming evidence that the “liberalization” of financial services generally leads to financial crises, in both developed and developing markets. There is usually a five to seven year time lag b/w liberalization and a banking crisis. And as we are witnessing, banking crises have long-lasting effects on GDP growth. The short of what I am arguing is that it may just not be worth it to overly liberalize your financial industry.

    This is inherently a complex issue, though, and heavy regulation for the sake of heavy regulation is not the answer. I think regulation is fundamental, given the falleness of human nature. But not all regulation is created equal.

    In the end, I’d rather conservatives then populist Democrats write the regulation.

    …on a side note, I actually might be in favor of going back to some of the draconian laws of the 19th century (as I understand them), when bankers could be put in prison if their banks become insolvent and they couldn’t pay out their depositors. TARP created moral hazard. I think reinstituting those types of rules for Wall Street would bring them back in line? ..maybe a bit too much.

  7. Stephen,
    Sorry so long for a reply. I have been a bit out of touch the past few days. I agree in principle with your thoughts here.

    Reasonable regulation is certainly in order, but the government cannot be expected to insure the bad decisions of our financial institutions, and neither can the American consumers.

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