Gelinas on the bank tax

January 14, 2010

The great Nicole Gelinas on the bank tax (I have Q&A coming up with her late, BTW):

Normally, when you tax something, you get less of it. And Obama & Co. will likely claim they want to tax the borrowings of too-big-to-fail banks to make them smaller. But the rule won’t work here: All imposing this fee will do is hammer home the idea in bondholders’ minds that the firms — reportedly the nation’s top 20 financial companies — are too big to fail, that the government will bail them out again the next time they screw up.

Will New York’s congressional delegation bite? They’ve fought other recent tax-the-banks ideas, rightly viewing them as damaging to the local economy. In December, Reps. Pete King (R-LI), Carolyn Maloney (D-Manhattan), Anthony Weiner (D-Brooklyn) and others wrote to Ways & Means Committee Chairman Charlie Rangel opposing any tax on financial transactions, squelching a proposal from out-of-state lawmakers. Sen. Chuck Schumer, too, made his opposition clear.

But the delegation might support this one. Obama can couch it as regulatory, not punitive, and most of our House delegation voted to “fix” financial regulations last month. Also, the president can say that the fee is temporary, until banks have cut their liabilities and repaid taxpayer bailout losses — and argue that the fee helps Wall Street by defusing public anger and forestalling a more draconian “fix.”

As for any bid to pitch the fee as “temporary”: The British last month announced a “one time” 50 percent tax on bonuses. But the opposition party won’t commit to removing it, should they win office — because Britain needs the money.

Kyle Bass, managing director of the hedge fund Hayman Advisors, testifying yesterday to the Financial Crisis Inquiry Commission, got at what real reform means, including: 1) limits on borrowing and 2) mandatory trading rules for financial instruments such as credit derivatives.

AIG used such derivatives to help bring the economy down, forcing its government bailout. “A key problem is the leverage,” Bass said — because with borrowing and trading limits, AIG could have bankrupted itself, but not everyone else.

Yet derivatives remain unregulated — and the bill the House passed last month to fix the problem was filled with loopholes. Meanwhile, the Senate is completely lost.

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President’s big-bank fee saves online traders from a wider financial-transaction tax

President Obama’s big-bank fee is covered in the leading media today, including New York Times and Wall Street Journal. The President is scheduled to unveil it soon this morning.

This bank fee (tax/levy/insurance) has been in the making a while and it will be hard for the targets to stop it. They can’t make sausage deals with some Congressmen as it’s going to be in the president’s budget. The public on both the left and right have great populist anger against TARP bailouts and Wall Street. The Financial Crisis Commission is taking Wall Street to the woodshed and this is softening up the target and empowering the taxman.

Wall Street made windfall type profits during the financial crisis recovery with excessively low interest rates from the Federal Reserve, so they had a license to print profits with a crisis-large yield curve. The public views Wall Street as Crisis-Profiteers, like War Profiteers, especially witnessing what they view as obscene levels of bonuses during this fragile Main Street recovery.

So the governments proposed bank fee of 0.15 percent (15 basis points) assessed on big banks non-tier 1 asset positions (the riskier ones) is a new big-bank-only transaction tax. The government promised (so far with the leaks) that this new bank tax can’t be easily and directly passed on to consumers, which includes investors of all types including online traders. Let’s get more details today and in the President’s budget, and listen to complaints from the banks which may bring to light valid unintended consequences.

If this big bank fee/tax is the mechanism for paying back remaining losses in TARP, that undermines the stated basis for Congressional bills calling for a wider financial-transaction tax.

For all proponents of a financial-transaction tax that don’t give up their fight, the obvious rebuttal is to say this big-bank fee is a financial-transaction tax on risky too-big-to fail positions. Plus, it’s the only way to protect Main Street consumers and investors – the wrongful targets – from a wider and unfair financial-transaction tax. End of story, the proponents got their tax and why try to extend it to unintended targets, the little guy?

Does this new bank fee mean online traders are safe from further realistic attack? It’s way too early to fly the “Mission Accomplished” banner. Hardcore proponents like economist Dean Baker (still out to sell his upcoming book on the subject) won’t give up on a financial-transaction tax. But, with this new big-bank fee, the administration is taking a wider financial-transaction tax off the table in the U.S. for the foreseeable future. It will be hard to pass a wider financial-transaction tax in any major financial center unless all leading centers cooperate to enact it. With the U.S. opting out for now – and following what Secretary Geithner said the U.S. would not support – global enactment in my opinion has even less of a chance of passage than a global climate control treaty over the next few years.

Sorry that our apparently being spared from a wider financial-transaction tax comes at the expense of Wall Street’s big banks and other financial institutions (over 50 billion of capital). I feel good that they have recovered from the crisis, are growing nicely again, earning good bonuses and I believe they should be able to weather this government storm. In our case, a wider financial-transaction tax would put traders out of business overnight, whereas this big-bank fee budget proposal is just an additional and affordable cost of doing still-very- profitable business for Wall Street.

Traders still face many new obstacles coming from Washington like restrictions on naked access, reined in leverage, higher capital, more restricted position limits, and other regulatory rules too. Plus, new taxes on the investment community like the Senate’s health tax proposal for a 1 percent Medicare tax applied on earned income, plus for the first time investment income too (a ground breaking change in the tax code).

Don’t forget carried interest tax breaks are repealed in 2011 per President Obama’s 2010 budget passed last February, and the House alone just passed a bill to repeal carried interest a year earlier in 2010. Capital gains and qualifying dividends taxes are going up in 2011 to 20 percent from 15 percent. All types of taxes are going up and that includes tax attacks coming on the investment community.

So keep watching our backs and keep fighting together. Plus, we still need to hammer down fringe nails on the financial-transaction tax when they arise which I expect will still be fairly often, if not in the U.S. then in Europe.

Yes, this is just a proposal for a Presidential budget item and the President needs Congressional approval. Plenty of things can go wrong still so we must remain vigilant. But this is shaping up to be a foundation for no US wider financial-transaction tax and we all know how much damage that would cause to the American economy.

I just heard on CNBC that the banks were totally surprised to learn about this new big-bank transaction tax? How can big banks claim that level of ignorance? For months, we have been fighting a very public call for a financial-transaction-tax intended to address infractions on Wall Street. Main Street traders claimed the tax would too heavily fall on Main Street and Wall Street would deflect it or win exemptions. That would be perverse. The President talked about this big-bank tax in August too. Did Wall Street risk management departments miss this one too? We asked Wall Street to help in our efforts and they raised a blind-eye. Wall Street did not care to help online traders with our petitions and efforts and I don’t think we should be cannon-fodder for Wall Street now either in attempting to help them (which wouldn’t work anyway).

Posted by Robert A. Green, CPA | Report as abusive