Taxing Banks Gains Favor, But Is It The Answer?

In January, President Obama floated an idea to tax banks as a means of compensating America for the tremendous financial damage caused by the collective stupidity and greed of the banking sector.  That idea is gaining support on both sides of the Atlantic.

Anti-Wall Street sentiment, in conjuction with concerns over the ballooning  budget deficit, have Democratic leaders on Capitol Hill embracing the proposal.  Obama's proposal is expected to raise up to $117 billion to cover projected bailout losses.   Republicans have been silent as their instinctive opposition to tax increases is in conflict with their fear of defending big bankers.

The administration has opposed interfering with bonuses in the past, saying shareholders and Boards of Directors should be responsible for determining corporate compensation.  

“We’re already hearing a hue and cry from Wall Street suggesting that this proposed fee is not only unwelcome but unfair,” he said.  “That by some twisted logic it is more appropriate for the American people to bear the cost of the bailout rather than the industry that benefited from it, even though these executives are out there giving themselves huge bonuses.”

The proposed tax would apply to bank, thrift and insurance companies with more than $50 billion in assets and would start after June 30.  It would not apply to certain holdings, like customers’ insured savings, but to assets in risk-taking operations. 

The concept is gaining momentum in Europe.  However, different countries have proposed varying structures.

Germany and Sweden would use the money to fund a "resolution authority" that would use the money to shut troubled banks whose failure would put the broader economy at risk.  Others, such as France, would assess the fee after a crisis passed.

Officials in the U.S., Europe and the IMF say the bank-tax concept has gained so much momentum that it is likely to be on the agenda when of the Group of 20 industrial and developing nations meet in Canada in June. "Reforms would put in practice the principle that large institutions should bear the costs of any losses to the taxpayer," U.S. Treasury Secretary Timothy Geithner said in a speech last week.

In the U.K., Prime Minister Gordon Brown has been championing a global levy, including one in which revenues would be used to help pay down deficits.  The opposition Conservative Party says it will press ahead regardless, although the fee's size will depend on how far other countries follow

The IMF plans to recommend a bank tax when global economic officials convene in Washington in April and is leaning toward a fee in advance to fund a resolution authority, said officials involved with the IMF effort.

Support for a bank tax isn't unanimous among the G-20.  Canada, which now has an outsized role in the group's deliberations because it hosts this year's meeting, opposes a tax on its banks.

Instead, Canada, whose banks weathered the crisis well, is pressing the G-20 to stiffen leverage requirements to avert problems, a proposal that has already been on the group's agenda.  India and China haven't taken positions.

Unfortunately, any industry specific tax, like the old "windfall profits tax" imposed on oil companies in the 1970's, will only make a troubled situation worse.  The problem in the finacial industry has always been "moral hazard", the practice of allowing banks take excessive risks and then rescuing them when their ill-advised risk-taking backfires.  This practice incentivizes a "heads I win, tails I DON'T lose" mentality.

The other problem is the very "cozy" relationship between the big banks, the Treasury, the Federal Reserve and the administration itself.  Major banks should be treated at arms-length, but they're not.  With an administration made up of Goldman Sachs alumni, the "conflicts of interest" will undoubtedly lead to legislation that looks tough on the surface, but will instead leave the banks with a "bank-door" way to coin money.

The only mechanism to enforce a fair playing field is to HAVE a fair playing field.  WE DON'T.

Marko's Take?   Don't waste our time with legislation that will only buy votes from angry Americans and get out-of-bed with these institutions.  Only then can we create a competitive and fair financial system.

Marko's Take

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