Goldman Sachs is entitled to make as much money as it wants from proprietary trading–that is trading stocks, bonds, currencies and bonds for its own account. But as long as Goldman benefits from bonds it sold with a government guarantee, it should pay an extra tax on those prop trading gains.
The Wall Street Journal editorial today proposed a tax along this lines and I think it’s a good idea. It’s not often I find myself in agreement with the WSJ editorial page, but the paper’s edit writers are right in calling for an “FDIC bailout tax.”
The Journal suggests tying this tax to the leverage ratio of any financial institution, like Goldman, that is deemed too big to fail. But I’m not sure how that would work.
An easier way to institute such a tax would be to simply impose it on the profits a firm like Goldman made from prop trading. Such a tax also would have the added benefit of forcing Goldman and other firms to break out revenues and profits for prop trading and trading for customers.
Goldman and other banks currently lump all trading revenue together–making it impossible for investors to understand how these giant financial institutions tick.
Goldman and other too big to fail banks could get out from under this tax by retiring the billions in bonds they sold during the winter with the backing of the Federal Deposit Insurance Corp.
As long as taxpayers are implicitly on the hook for saving these too big to fail institutions, big banks like Goldman should be paying more in tax dollars for the priviledge of their elite status.