How to get our money back from the banks

By Felix Salmon
January 11, 2010
had to pay back some of the enormous fiscal cost of the financial crisis they were largely responsible for causing.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

Of course it would be great if the big banks, currently making outsize profits thanks to the Fed’s zero interest-rate policy, had to pay back some of the enormous fiscal cost of the financial crisis they were largely responsible for causing.

The Obama administration has come under pressure at home and abroad to support a financial transactions tax on institutions and to heavily tax their executive compensation.

But the United States, led by the Treasury Secretary Timothy F. Geithner, has been opposed, arguing that a transactions tax would simply be passed on to customers and a bonus tax could be easily circumvented.

So, how to do this? The NYT and Politico are talking about some kind of “fee”, but it’s hard to see how to stop that from being passed on to customers. Simon Johnson, then, reckons it should be the bankers who are targeted, rather than the banks:

The answer is easy: people working at our largest banks – say over $100 bn in total assets – should get zero bonus for 2009…

The administration should immediately propose and the Congress must at once take up legislation to tax the individuals who receive bonuses from banks that were in the Too Big To Fail category – using receipt of the first round of TARP funds would be one fair criterion, but we could widen this to participation in the stress tests of 2009.

The supertax structure being implemented in the UK is definitely not the right model – these “taxes on bonuses” are being paid by the banks (i.e., their shareholders – meaning you, again) and not by the people receiving the bonuses.

Essentially, we need a steeply progressive windfall income tax – tied to the receipt of a particular form of income. This is tricky to design right – but a lot of good lawyers can get cranking.

I think Simon is right that such a tax is hard to design, and therefore wrong that it’s in any way “easy”. If you tax 100% of bankers’ 2009 bonuses, then the banks simply won’t pay any 2009 bonuses, and you’ll get no revenue. Meanwhile, banks will just double those bankers’ bonuses in 2010.

I don’t think there’s any easy answer here, but I do think that Simon is unnecessarily harsh on the UK supertax, which seems to have worked quite well: banks are doubling their bonus pools and paying half to the government, raising a lot of money for the public fisc. Yes, the public does own a large number of bank shares. But I see no evidence that the UK supertax has done particular damage to bank stocks.

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
8 comments so far

But note that the UK tax was explicitly and implicitly designed to encourage banks operating there to not pay their employees but rather book those unpaid monies as retained equity in order to strengthen the banks’ balance sheets. Sure, the UK taxpayer will get some of its money back, but at the expense of weakened risk capital positions at its major banks. The nightmare scenario, of course, is that the UK government might have to use those extra tax proceeds (plus others, no doubt) to bail out failing banks a second time.

There is a third party you need to keep track of, too: outside bank shareholders. I pointed out in a comment on Simon’s post that to truly recapture the taxpayers’ subsidy from banks, you should tax the firm before compensation, thereby hitting the employees and shareholders together. It makes no sense to me that shareholders should get a free pass and benefit from the public’s largesse, either.

In any event, one can see the dilemma. Three parties are involved in a zero sum game: bank employees, bank shareholders, and the government. Somebody or everybody is going to get hurt. The question is who (and how). The UK’s example shows that it is not patently obvious policymakers can figure this out beforehand.

Posted by EpicureanDeal | Report as abusive

RE: the supertax. And would it be bad if the supertax hurt shareholders? It seems that business-owners should ultimately bear the burden of a tax. And they, in turn, could punish their employees by paying smaller bonuses.

Of course, I know that doesn’t work in practice. There aren’t enough mad-as-hell shareholders organizing board ousters.

Here’s an idea, what about a tax on the revenues (not profits) of a bank? Make them pay whatever penalty you’d like before they can dole it out to employees.

Posted by PopEconomics | Report as abusive

How about making the interest rate the Fed charges dependent on the percentage of debt that the loan represents relative to its size? Banks that borrow more than their share from the Fed (mainly to prop up their balance sheets) would pay a higher cost for this capital, and should make them less competitive with banks that don’t rely on the Fed as much.

Banks like Citi and BofA, which are very dependent on cash from the Fed, would pay a higher interest rate than other banks, and should reduce their profits without making them more susceptible to collapse. The lower the profits, the lower the bonus (at least in theory). The interest rate modifier could be viewed as a fee for the Fed assuming more risk, and would provide incentive for banks to become less dependent on it. This would also reduce the number of risky loans made, as the higher cost of capital for banks makes them less attractive.

Posted by OnTheTimes | Report as abusive

I say tax the banks. This way, we make them have a stake in lowering bank pay. They cannot forever pass the cost of the tax onto consumers. people always have the option of moving to another bank.

Posted by rogueecon | Report as abusive

I’m with Epicurean on this. The LAST place this is going to hurt is the wallets of the banksters. It will hit shareholders and bank clients in higher fees, etc.

The only good part of it is that the taxpayers may get their money back–and more.

I think it will have to be the large institutional investors who own significant shares in these banks to vote, “enough is enough.” And if they won’t, none of the rest of us, together or separately, have the clout to constrain WS greed.

Posted by Lilguy | Report as abusive

“Geithner, has been opposed, arguing that a transactions tax would simply be passed on to customers”

The transactions tax is a sin tax. Certain trading behaviors are perceived as socially detrimental (whether this is the case is a separate argument), and the tax is meant to discourage these behaviors.

And yes, the cost will be passed to consumers, as are all business taxes. But that’s an argument in favor of the tax, since it gives businesses an incentive to find ways to reduce their transaction costs and pass the savings to the customers, thereby capturing more market share.

Posted by KenInIL | Report as abusive

Haven’t thought it out completely but why not just raise the equity levels of the banks.

If they were forced to reduce their leverage they would have to retain a chunk of those earnings to boost their balance sheets(much needed) and there would automatically be less to pay out.

Posted by Schooner | Report as abusive

I think that these bankers are not alone. Lots of business people, including auto company executives drain the capital from their companies. Many times, and this includes bankers, do a poor job and still get the big bonuses. I do not know how to slow this greed down, but in the end nobody has a U Haul trailer attached to their coffin. If you have any sense of decency you cannot take a huge bonus when so many people are hurting and just trying to put food on the table.

Posted by fred5407 | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see