The White House is poised to propose a $90 billion tax on big banks to recoup losses from the Troubled Asset Recovery Program (TARP). After all the repayments banks have to make under TARP's original conditions, the government now expects losses of $117 billion to remain. If that's the case, the tax would be kept in force until the full amount of losses is recouped. The remaining losses so far come mostly from three money-eating "investments" -- American International Group (AIG), General Motors and Chrysler.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%It would be fair to reclaim those losses from these three companies -- but that's not where the money is. And the Obama administration knows that. So it's aiming where the money is: at the biggest financial institutions.
The banks, of course, say "no fair." But I disagree. Despite wriggling in front of Congress yesterday, Wall Street is the primary culprit for the financial crisis and should pick up these losses -- especially AIG's. That's because many Wall Street banks got a back door bailout through AIG when the government made good on the credit default swap payments AIG owed the banks but couldn't pay on.
When the Securitization Factory Broke Down
Although we don't have a compete explanation of what caused the financial crisis, we know that its core problem was securitization -- bundling loans into securities based on those loans' cash flow and selling the securities to investors.
Wall Street built and operated this securitization factory. And when it ran out of the original raw material it was using -- mortgages from people who had a good chance of repaying -- it started pushing mortgages onto people who had no chance of repaying. Then Wall Street borrowed around $30 for every $1 of capital used to fuel this factory. When those loans indeed weren't repaid, the securities became toxic. And we all know what happened next.
The cost of securitization gone toxic is staggering: $30 trillion in 2008 global stock market losses, record foreclosures of 2.8 million in 2009, 27 million people underemployed, 10% unemployment, a government bailout that could hit $23.7 trillion, and the public's indignation at watching the very bankers who caused all this pain pay themselves record bonuses just a year later.
Expect a Mighty Struggle
The White House proposal would seek to discourage the kind of risk-taking that started this mess and reduce bonuses by taxing the riskiest assets on Wall Street balance sheets. Specifically, The New York Times reports that the IRS would collect the tax -- about $1.5 million for every $1 billion in bank assets subject to the fee -- from about 50 firms including AIG -- although it has clearly not repaid enough. Among the institutions subject to the levy are Goldman Sachs (GS), JPMorgan Chase (JPM), General Electric's (GE) GE Capital unit, HSBC, Deutsche Bank, Morgan Stanley (MS), Citigroup (C) and Bank of America (BAC).
The tax would apply to risky assets -- excluding capital such as common and preferred stock, disclosed reserves and retained earnings. Also exempt are a bank's insured deposits because banks already pay the FDIC a fee for those.
Banks are going to struggle mightily to avoid paying this tax. If it goes into law as a tax on risky assets, then they'll try to find a way to keep doing the risky business that uses those assets without subjecting them to the tax. If the banks can't hide from the tax, they'll find a way to pass it on to customers through higher fees. If that happens, the effort to channel anger at Wall Street for constructive purposes will only incite more public rage. But if TARP's losses are recouped through smaller bonuses to Wall Street bankers, the public will sense justice has been done.
Still, it seems safe to say that the last thing the banks will do is what's just -- to pay that tax by paying themselves smaller bonuses. In the stand-off between the Commander-in-Chief and Wall Street, it's hard to see that taxpayers won't end up paying the bill.
Peter Cohan owns shares in AIG, Citigroup, and GE and has no financial interest in the other securities mentioned.
Meet Peter Cohan at The World Money Show Orlando, Feb. 3-6, 2010, at The Gaylord Palms Resort.
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