Whither the bank tax?

By Felix Salmon
October 6, 2010
Remember the Financial Crisis Responsibility Fee?

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Remember the Financial Crisis Responsibility Fee? It seemed like a great idea at the time, raising money for Treasury while at the same time acting as something of a too-big-to-fail tax which would help give banks a disincentive to grow too big or to move away from a stable deposit-based funding base.

But the stated purpose of the bank tax was to repay TARP — and now it seems that the TARP shortfall is going to be less than $30 billion. So it’s both politically and rhetorically hard to get it passed right now. Jim Pethokoukis reports that “it wasn’t included in the summer’s financial reform bill for fear of scaring away Republican support,” but says that it might yet be resuscitated as a way of making up the government’s losses on Fannie and Freddie.

For the time being, however — and for the foreseeable future through the rest of Obama’s first term in office — the bank tax seems to be dead, even as similar taxes in Europe have never been more popular. It’s yet another sign of how European and American attitudes towards the banking sector are diverging: while the Americans took a hard line in the regulatory negotiations in Basel, they’re much less keen on bank-specific taxes. The Europeans tend to move the other way, towards laxer regulation and higher taxes. In a world where financial services are borderless and globalized, that divergence is little more than a recipe for regulatory arbitrage.


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“But the stated purpose of the bank tax was to repay TARP — and now it seems that the TARP shortfall is going to be less than $30 billion.”

Why do people keep pretending this is a true statement? The original TARP consisted of (1) loans and (2) calls on future equity (explicit stock ownership and/or warrants).

To claim that you’ve been “almost paid back” when the funds have come in large part from selling those equity options is to either (1) lie or (2) claim that the value the future equity of the financial system is nothing.

Anyone know a VC who would lend out $700MM and be happy when the product was launched successfully to get $700MM back? Or is financial journalism really for people who can’t do math–which is only true (see, e.g., Dan Gross or Felix) when talking about TARP?

Posted by klhoughton | Report as abusive

klhoughton, the Fed isn’t a VC firm and the megabanks aren’t startups. The goal of TARP was to put an end to the cascading large failures at minimal cost to the taxpayer. Even if you think they should have extracted a greater profit (in exchange for the risk that things DIDN’T work out), you have to admit that they succeeded in the essential goal.

I personally find the bookkeeping a little wonky, though, since TARP included so many different types of stabilization funds. The money given to Wells Fargo and JP Morgan was always certain to be paid back. The money spent on AIG was suspect from the start. Wasn’t the automaker bailout also lumped in with the financial institutions?

The real “bailout”, however, wasn’t TARP. It was (and is) the historically low short-term interest rates that we’ve been seeing. Almost impossible to lose money banking when your spreads are this wide. Likewise, the major bailout of the automakers was the forced restructuring of their labor agreement.

Posted by TFF | Report as abusive

klhoughton, I can think of plenty of VCs in this market that would have been happy with the returns they got on say the GS part of TARP.

TFF, depends on what bit of AIG you are talking about. Those CDO tranches that were swapped in return for 100 cents on the dollar that got everyone exercised about are currently showing a profit if nearly 4bn after factoring in a loan of 300bips above fed funds( If i recollect rightly ).

Posted by Danny_Black | Report as abusive

And regulatory arbitrage was exactly of the financial crisis with European banking free to leverage investing in US and US institutions like AIG doing what they did with European counterparts…

Posted by M.G.inProgress | Report as abusive