Obama Says Bank Fee Aimed at Recovering Rescue Money (Update 1)
Jan. 14 (Bloomberg) -- President Barack Obama said the levy he wants to impose on as many as 50 large financial firms is aimed at getting back “every single dime” that taxpayers put in to bailing out those companies.
“My determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people,” Obama said at the White House.
The fee would apply to financial companies with assets greater than $50 billion. The levy would be based on bank liabilities and be imposed starting June 30 on companies such as Citigroup Inc., American International Group Inc. and Bank of America Corp.
The administration estimates it will raise $90 billion over 10 years and $117 billion over 12 years. An administration official who briefed reporters said the budget office estimates the 10-year figure will be enough to recoup all the losses in the Troubled Asset Relief Program.
With congressional elections coming up in November, Obama is tapping into public anger over the taxpayer bailouts of the financial and auto industries, Wall Street bonuses and the deficit, which hit $1.4 trillion last year. Reports about bank profits and bonuses come as the nation’s unemployment rate is at 10 percent and many Americans are still struggling to recover from the worst recession since the 1930s.
Anger at Banks
“The public is incredibly angry at the banks and feels that the banks have made a huge amount of profits off the taxpayer rescue,” said Doug Elliott, a fellow at the Brookings Institution in Washington and a former managing director at JPMorgan Chase & Co. “Virtually every figure in Washington right now is trying to step forward and make clear they’re with the people and not the bankers.”
A more detailed plan will be included in the budget message Obama is due to send Congress next month. White House or Treasury officials contacted most of the companies affected and have been briefing lawmakers on the plan, according to a senior administration official. The plan requires approval by Congress.
“If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers,” Obama said.
Industry Reaction
Even before it was formally released, the proposed Financial Crisis Responsibility Fee drew criticism from the industry.
“Using tax policy to punish people is a bad idea,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, 53, said after testifying yesterday at a hearing of the Financial Crisis Inquiry Commission in Washington. “All businesses tend to pass their costs on to customers.”
Companies including JPMorgan, Citigroup, Wells Fargo & Co., Bank of America, Goldman Sachs Group Inc. and Morgan Stanley were among the biggest beneficiaries of the government’s initial purchases in October 2008 of preferred stock and warrants with money from the $700 billion TARP fund. All but Citigroup have repaid the money, according to a Treasury Department report released yesterday.
Covered institutions include bank holding companies, thrift holding companies, insured depositories, as well as insurance companies with such entities and broker-dealers. More broadly, the official said that firms covered under the Federal Deposit Insurance Corp.’s. Temporary Liquidity Guarantee Program would be subject to the fee.
Boost Liquidity
The program was established to back senior unsecured bank debt and boost liquidity in the banking system. Participating companies also included General Electric Co. and its finance unit, GE Capital.
Some companies that didn’t receive TARP funds would face the fee, the official said. The administration is using the argument that that every major financial firm in the U.S. is a beneficiary of government steps to bolster the industry.
“The tax will penalize the firms who repaid TARP with interest and those who never even accepted it to begin with,” said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, which represents large banks. “It will decrease the availability of loans and limit economic recovery.”
The fee would be approximately 15 basis points, or 0.15 of a percentage point, of covered liabilities, or total assets minus Tier 1 capital -- common stock, disclosed reserves, retained earnings -- and excluding FDIC-insured deposits for banks or insurance policy reserves for insurance companies, the official said.
Double Fee
Deposits covered by the FDIC and insurance policy reserves are being exempted to avoid placing a double fee on institutions, the official said.
General Motors Co. and Chrysler Group LLC, which also got government aid, would be exempt, as would smaller banks. As such, the fee will leave the country’s largest financial firms, even those that have paid back their assistance, to cover losses from the government’s bailout of U.S. automakers.
The levy also won’t be assessed on Fannie Mae and Freddie Mac, the government-supported companies seized by regulators in 2008. The official said the administration concluded charging Fannie and Freddie the fee wouldn’t be in taxpayers’ interest.
35 U.S. Companies
The fee will apply to roughly 35 U.S. companies and up to 15 U.S. subsidiaries of foreign companies, the official said.
While additional details are still being worked out, the fee is expected to vary by year, growing slightly over the 10- year period, the official said. The administration plans to consult with members of Congress and outside experts before it is released in the budget.
The official also said that Congress would be able to amend the fee in the future based on its own determinations.
The administration expects that most institutions won’t pass on the cost to consumers because they would be at a competitive disadvantage with banks that aren’t subject to the fee, the official said.
While there’s a high probability for the proposal’s passage in the House, its fate in the U.S. Senate is less certain, according to FBR Capital Markets analysts led by Paul Miller.
“Our sources on Capitol Hill indicate that the TARP tax has a very low probability of passage in the Senate, as nearly all Republicans and a sufficient number of Democrats would likely vote against the measure,” the analysts, who are based in Arlington, Virginia, wrote in a note to investors today. “The proposal has a higher probability of passage in the more populist-driven House.”
Democratic Support
The plan won support from key House Democrats even before details were released. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said he was in favor of such a fee.
Frank said it is “very fair” to tax banks that have repaid their TARP money, particularly large institutions that were “skating around dishonesty.”
While many banks repaid the money, “in almost every case, they engaged in practices that made this all necessary,” Frank said. “Every one of those institutions was engaged in the kind of activity that led to the problem.”
Michigan Representative David Camp, the top Republican on the Ways and Means Committee, said while he and other Republicans find bonuses being paid by banks that got bailouts “irresponsible” and “outrageo