Obama Administration Mulls New Bank Tax

By some measures, the U.S. government has already made a tidy profit on a part of its TARP investment in the financial industry. Of a total of around $364 billion invested so far, the U.S. Treasury has made profits totaling $16 billion in dividends and the sale of warrants, among other things. Several large and small banks, including JP Morgan Chase (JPM) and Bank of America (BAC), have repaid the government in full for a total of $164 billion.So, why is the Obama administration talking about imposing an additional fee on banks? "It's a great way for Democrats to rebuild their polling numbers," says Bert Ely, principal at bank consultant Ely & Co.

Besides being a move to appease the public, it's also an easy way to raise money from a business community that is already loathed by most Americans. The money could be used to cover shortfalls in bailout programs and perhaps to help balance the federal budget.

"It's a politically expedient way to cash in on the distaste in popular sentiment for large banks," says Bob Meara, senior analyst at banking consultant Celent. "This is another way to pay for the government's burgeoning spending habits."
Just last month, three of the largest American banks – Bank of America, Citigroup (C) and Wells Fargo (WFC) – repaid a total of $90 billion back to the Treasury. The government also collected an additional $2.5 billion from Bank of America and $1.4 billion from Wells in dividends.

The latest talk to impose either a fee, or a one-time tax on banks, is already raising the ire of the banking industry, especially since the largest losses so far or even expected losses are from parts of the financial industry that aren't banks.
For instance, in a Congressional Oversight Panel report, a Senior Advisor on Auto Issues at Treasury, Ron Bloom, said it was "unlikely that taxpayers would recover all of the money they had invested in Chrysler and General Motors." And Neil Barofsky, the Special Inspector General overseeing TARP, said "full recovery is far from certain" from the government's investment in American International Group (AIG).

The largest loss so far has been a $2.3 billion hit from the bankruptcy of CIT Group, which is a small business lender, not a bank.

Others believe that the large bonuses on Wall Street gives the impression that bankers are getting away with bloated payments while the rest of the country suffers from the problems the industry created.

"The administration and politicians are in a bind to come up with punitive measures that will convince the electorate that appropriate steps have been taken so that evil bankers aren't benefiting from the misery they created," says Richard Bove, banking analyst at Rochdale Securities.

If imposed, this would add on to recent payments that banks have already made to a federal agency . Last month, banks had to prepay their deposit insurance premiums for three years to the Federal Deposit Insurance Corporation or the FDIC. With over 100 bank failures so far this year, the Deposit Insurance Fund's balance dipped below zero and the FDIC raised $45 billion at the end of 2009 from the banks' prepayments.

Ely says that if the fee is levied as a transaction tax, banks will just decide to conduct their transactions offshore, which will take away business from the U.S.

However, both Ely and Meara believe that that the Administration will likely not adopt the idea, partly because Treasury Secretary Timothy Geithner has in the past opposed such an idea.

"Hopefully smarter heads will prevail and none of this will come to pass," says Ely.

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