UPDATE – 2:05 P.M.: In his remarks this morning announcing the proposed tax on the nation’s biggest banks, President Obama said he wants to “recover every single dime the American people are owed.” He went on:
“What I say to these executives is this: Instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities.”
Just as the big banks are getting set to pay billions of dollars in bonuses next week, President Obama will announce a proposal later this morning to tax 50 of the largest banks and financial institutions over the next decade to pay back the costs of the government’s financial rescue plan.
The tax is expected to raise at least $90 billion over 10 years by taxing a percentage of a bank’s liabilities, or what is often seen as a bank’s remaining assets after setting aside certain levels of core capital, equity, common stock and government-insured customer deposits. The level of liability is one way of measuring how much risk an institution has taken on, and administration officials told reporters last night that the plan is designed in part to lower the level of risk in the financial system.
The tax is being called a “financial crisis responsibility fee.” And a senior administration official told reporters last night that the banks that will be taxed “were significantly responsible for the enormous degree of the reckless risk-taking” that led to the crisis.
Treasury officials said the law that created the $700 billion Troubled Asset Relief Program that provided cash to banks during the financial crisis also included a provision requiring the government to recoup taxpayer losses from the financial sector.
The president is not obligated to submit a proposal for doing so until 2013, but the administration said Wednesday there was no reason to wait until then in light of the “extraordinary assistance” provided to the financial industry and the fact that banks are earning profits and paying bonuses.
“It’s the least they can do,” said a senior official, who insisted on being unnamed before the president announces the plan today. “They need to rebuild their trust…It is our belief that major financial institutions were both significant causes of the historic financial crisis that has inflicted widespread harm on the economy and then have been beneficiaries of extraordinary efforts to stabilize the economy.”
The Treasury Department estimates that the overall cost of the original TARP plan has shrunk from $341 billion to $117 billion. And it’s expected to drop to $90 billion within the next 10 years.
The top five Wall Street banks earned roughly $30 billion in profits through the third quarter of last year. And billions have been set aside for compensation.
Referring to what he called “offensive” and “excessive outlandish bonuses,” the official said, “if they can afford that, they can start paying back now.”
Most of the big firms in the financial sector that took TARP money paid it back with a profit to the government in 2009. More than $160 billion has been repaid by more than 60 banks.
Government officials would not name which companies would be affected, but the tax is expected to apply to most of the big banks and investment houses, such as J.P. Morgan Chase, Goldman Sachs, Citigroup, and Bank of America*. It would take effect on June 30 and would also apply to insurance giant AIG and other large institutions that have $50 billion or more in assets and have bank holding companies as part of their business.
Administration officials said that of the roughly 50 firms subject to the tax, 35 will be U.S.-based companies. Sixty percent of the money is expected to come from the 10 largest companies. Some subsidiaries of foreign banks such as Deutsche Bank are expected to be subject to the tax as well. While some firms that may be taxed did not receive money through the TARP program, administration officials say they still should have to pay because of other measures taken to save the financial system at the time.
“No one should suggest they were islands on to themselves, untouched and not benefited by the extraordinary policies that have been taken under the Obama administration,” the official said. They have “to pay back the broader costs.”
Wall Street and big banks have been critical of the idea of a tax, arguing it would hurt investment and their business while the economic recovery was still fragile. And they warned the tax would ultimately be passed down to customers.
“Using tax policy to punish people is a bad idea,” Jamie Dimon, the chief executive of J.P. Morgan Chase told reporters Wednesday after testifying before a commission looking into the causes of the financial crisis. “All businesses tend to pass their costs on to customers.”
But the Obama administration said it did not buy that argument and used tough populist-style language during a telephone briefing with reporters last night.
“It’s beyond the pale” for banks to suggest that they will have to pass the costs on, one official said. If they do, “they will do so at the peril of losing market share. They will be at a competitive disadvantage from the large number of firms who do not have to pay.”
The plan does not apply to GM and Chrysler — which received assistance through the TARP program — or mortgage giants Fannie Mae and Freddie Mac, which have received hundreds of billions of dollars in assistance and debt guarantees from the U.S. government. Republicans have long accused Democrats of being soft on Fannie and Freddie.
Administration officials contended it would “not be productive” to apply the tax to Fannie and Freddie because of their continuing problems. GM’s troubles were more complicated, going back a number of years to other factors, but were also due in part to the fallout of financial crisis, he said.
“We are putting the largest burden on those (banks) of the largest size taking on the most excessive risk,” the official said.
Full details will be submitted with the president’s budget next month and subject to approval and revision by Congress. The administration plans to ask that the fee remain in effect for at least 10 years — even if the full costs of the TARP are paid before then. If the costs exceed $90 billion or cannot be paid by then, the tax would remain in effect.
“The fee will stay in place until every penny of TARP is repaid,” the official said.
*Bank of America is a NewsHour underwriter.