The last thing that President Obama wants to do is make Jamie Dimon and Mike Bloomberg seem like the sane people on financial services reform. Unfortunately that's what the newly proposed Wall Street tax did yesterday. The Troubled Asset Relief Program (TARP) projected to lose around $120 billion of the $700 billion authorized in the October 2008 bailout. To cover this loss the White House is looking a 0.15% tax on the liabilities of financial institutions with assets over $50 billion.
The tax is a great idea... if the president wants to create more incentives for firms to move off U.S. shores or limit their own growth. New York Mayor Bloomberg, who isn't always a stalwart of free markets, expressed exactly this sentiment in response to the White House proposal:
"I'm very concerned that we don't drive business overseas. London became a financial center when we increased regulation here," he said, adding, "I certainly hope our legislators in Washington will fight to protect our industry here."
The House is likely to pass the tax idea without a second thought. The same body has already approved a financial services reform bill that codifies too big to fail policy. And less than a year ago they also tried to put a 90% tax on bonuses.
The Senate is another matter, but they certainly aren't above such a tax. Especially given the punitive nature of it and the distaste the Senate has for Wall Street right now. Some are even calling it a "financial crisis responsibility fee."
According to the AP, a senior White House official, the tax will apply to any institution with assets of more than $50 billion, even if they didn't receive or accept bailout money. There are about 50 firms this tax would attack apply to. Most of the bailout money has been paid back or is in the process of being paid back. It is unclear why, JPMorgan, Goldman, or any other institution that has returned the TARP money—with interest—should be charged a tax to cover the firms that lost the money: namely, AIG and GM.
JPMorgan overlord Jamie Dimon made this point yesterday:
Using tax policy to punish people is a bad idea... It would be very hard for the industry to pay for the auto companies I mean, at one point you have to be a little fair.
If the Wall Street CEOs are so evil then why is Obama allowing them an easy change to sound so logical?
Tax proponents are arguing that this tax would be perfectly fair. The American people bailed out Wall Street and they owe us this. But this is totally backwards. Congress wasn't trying to do Wall Street a favor with the bailout. President Bush and his economic team scared the House and Senate into passing the bills, claiming a Wall Street meltdown would destroy the American people's economy.The bailout was done under the auspices of protecting Americans—not saving Wall Street for Wall Street's sake.
Whether or not the bailout was needed to save America, the saving has been done. And just because Wall Street has been able to use the cheap access to credit and full faith and credit of the U.S. government to build some faux-profits in 2009, doesn't mean the banks now have some kind of obligation towards the American people.
Holman Jenkins writes in The Wall Street Journal today:
What's more, despite a casual imputation that taxpayers were the suckers at the table, taxpayers did not, as commonly alleged, "spend" money to bail out the banks. They traded one claim for another. Mostly, they traded claims they printed (dollars) for claims on real assets, such as housing, commercial property and industrial equipment.
Taxpayers effectively acquired these assets on a bet that taxpayers' own intervention would raise their value, which had previously been depressed at least partly by fears that taxpayers wouldn't intervene. That bet has proved a good one so far (as bets often do when you control the outcome). Even the most notorious of the exchanges that taxpayers engaged in—dollars for securities held by Goldman Sachs that had been guaranteed by AIG—are accruing profits on the balance sheet of the Federal Reserve.
Looking at this from another angle, this tax idea makes little sense, especially in a market that is still trying to find a recovery footing. On the one hand, Washington says they are hellbent on getting the banks to lend to small businesses again. But on the other hand they are preparing to slap a load of unnecessary, detrimental regulatory changes on the Street and proposing to tax the most successful firms.
From my perspective, I don't think Uncle Sam's policy goal right now should be to get lending back to bubble-period levels, which is what the White House is pursuing. Why should we do that when that kind of excess is what got us here in the first place? But this doesn't mean the credit crunch we face today should be labled the new normal. For the economy to grow again, without government support, there will need to be a heavier flow of funds from banks and private equity to manufacturing and other industries. And this tax would not aid the process of getting us back to a place where that is happening.
One possibility in all of this is that, given the tough odds of passage in the Senate, that the White House is just trying to give the appearance of acting tough on Wall Street. Especially since a financial reform bill isn't all the way through Congress. Perhaps he realizes such a tax would result in less lending to small businesses, and is just trying to appeal to the American people. An understandable political move, but a problematic one. If that is case, the White House should realize that such moves only further erode banking confidence, causing the credit crunch to tighten. One of the main reasons that banks are sluggish in lending is the lack of regulatory stability at the moment. Banks don't know what new laws will be passed in this reform effort, or what kind of new capital requirements they will be forced to adhere to (read: figure out ways to get around). As a result most cards are being played close to the chest. And understandably so.