That bank-tax reported yesterday looks like it will be broader and tougher than initially reported.
The Huffington Post quotes a senior administration official saying that Obama will institute a tax not only to recoup taxpayer losses on the bailouts but also to penalize too-big-to-fail institutions and get back some of the taxpayer subsidy inherent in guaranteeing these firms’ survival.
That tax, if it’s steep enough, will incentivize banks to get smaller. It will be interesting to see how it’s structured—at what size the levy kicks in.
And this is also important and new: It appears the administration, even if it’s not going to call for the reinstatement of a Glass-Steagall split between trading and banking, is going to slap penalties on casino-like activities:
The administration official tells HuffPost that the planned tax would be imposed in a way that targets firms’ riskiest activities, such as proprietary trading. It would be crafted in a way that doesn’t affect a financial company’s retail banking, so that the cost theoretically would not be passed on to retail customers — but it wasn’t clear exactly how that would work.
“We want to put a price on the riskiest part of the bank,” the official said, speaking of highly-leveraged Wall Street trading, rather than Main Street lending.
That would be a big step and a somewhat-surprising one coming from the administration, which has shown little urgency in tackling the TBTF problem. Of course the details remain to be fleshed out here. I would hardly expect them to put an onerous fee on huge banks and if it’s too small, it will just be considered a price of doing business by the Citis, Bank of Americas and Goldman Sachses of the world.
This is excellent context from Simon Johnson, whom HuffPo interviews here:
Johnson also argues that the administration’s $120 billion tally for TARP losses is “low ball.” TARP is a direct cost, he said. But the country needed a fiscal stimulus to restart the economy, which “was only needed because of what the banks did. They should pay for that also,” he said. “There is no logic that says: reimburse us for TARP but the rest is on the house.”
That’s something people like Holman W. Jenkins don’t get—or at least pretend they don’t get. You’ll be hearing much more like this in the coming weeks and months as the banks’ friends and lobbyists ramp up their counteroffensive.
And I say “pretend they don’t get” because it’s not hard to figure out. Here’s Felix Salmon, whom reporter Shahien Nasiripour quotes here from the PBS NewsHour last night:
The Federal Reserve injected trillions of dollars into the economy.
“The federal government went to extraordinary lengths to rescue the economy from the crisis which was largely caused by the actions of these banks. And, so, all of that money, the extra money which the government spends, the reduced tax revenue which the government is seeing, thanks to the enormous unemployment across the country, the huge fiscal deficit which has resulted from the biggest recession since the Great Depression, this is an enormous sum of money.
Finally, the HuffPost is excellent to include a caveat here on this tax: We still don’t know how solvent the banking system actually is. If you tax it and the banks have been playing games with the mark-to-myth accounting rules, it’s going to be, um, counterproductive.
William K. Black, a professor at the University of Missouri-Kansas City and a former senior federal regulator during the savings-and-loan crisis, argues that the because of spurious accounting rules adopted last year, banks aren’t properly recognizing their losses, and are in fact largely insolvent.
He said now is the wrong time to be taking money out of the banking system because banks need it to guard against eroding assets like residential and commercial mortgages.
“We are blessing fictional numbers and believing our own lies,” Black said. “Taking capital out of the system…it’s a charade.”
This is good stuff. I’ll be interested to see how this story plays out in the major papers.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at email@example.com. Follow him on Twitter at @ryanchittum.