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Word trickled down that the federal government will impose tax hikes on major financial institutions. Judy Woodruff speaks with experts about what this could mean for the economy.
On Wall Street today, there was every expectation big banks will announce sizable profits for 2009, plus new bonuses for employees. In response, the Obama administration is weighing taxes to recoup losses from the $700 billion bailout program and other measures to rescue the financial system. The still unconfirmed plan could also help pay down the deficit, and it might soothe public anger.
It's definitely an outrage.
It's kind of obscene, because we bailed out the banks.
Most big banks that received public funds have repaid the loans, but others, including insurance giant AIG, plus General Motors and Chrysler, have not.
And White House spokesman Robert Gibbs said Monday the president is committed to sending a message to Wall Street.
ROBERT GIBBS, White House Press Secretary:
You have heard the president throughout the past year talk about the continued divergence from, in all ways, reality of what's going on, on Main Street and what's going on in some of these firms in Wall Street, that there are folks that just continue not to get it.
For the first nine months of 2009, five of the largest banks receiving federal aid set aside $90 billion for compensation, including salaries, benefits and bonuses. One of those was Bank of America, an underwriter of the "NewsHour."
Today, the Securities and Exchange Commission accused Bank of America of failing to disclose huge losses at Merrill Lynch before buying it. The bank is already charged with hiding bonuses paid at Merrill.
Still, the news of a possible bank tax was met with anger on Wall Street, where some saw it as a way to get at bonuses.
Jamie Dimon, chairman of J.P. Morgan Chase, told a Washington conference on Monday — quote — "I'm getting tired of the constant vilification. This is not a casino."
Still, the issue won't go away. The Federal Deposit Insurance Corporation said today that it may impose higher premiums on banks to discourage risky lending and investments.
The question of whether to tax banks may not be limited simply to costs associated with the so-called TARP program. All told, the Federal Reserve and the government committed several trillion dollars to the financial system at the height of the crisis.
So, what, if anything, should be done about the banks? We get two views. Bert Ely is a banking industry consultant who runs his own firm in Northern Virginia. And Felix Salmon is the finance blogger for Thomson Reuters. Previously, he worked for Roubini Global Economics.
Gentlemen, thank you both for being with us.
And, Bert Ely, to you first.
What is your understanding of what form any tax or fee would take?
BERT ELY, Ely & Company: Well, this is all very vague at this point in time, but it could be either a tax on financial transactions. It could be a tax on high-level executive pay. It may be a profit surtax or some combination thereof. At this point in time, we simply don't know the specifics of these proposals.
And in terms of whom it would be levied on?
Well, it presumably is going to be levied on large financial institutions, banks, both commercial banks, as well as investment banks such as Goldman Sachs and Morgan Stanley.
A big question is, where would the line draw — be drawn between large and small? And that would be one of the controversial aspects of this proposal, who gets paid — who has to pay and who doesn't.
Felix Salmon, what's your understanding of what they're talking about?
FELIX SALMON, Thomson Reuters:
Well, like Bert, it's still very unclear.
I haven't talked to anyone who knows what — what exactly is being planned. But I do think that this is essentially a bank — a tax on the biggest banks. It's a tax on being too big to fail, which was one of the key problems which led to the financial crisis. And it's something which we want less of. And if you are too big too fail, you're going to have to pay now.
And the purpose would be what? If most of these banks or all of the banks have repaid the TARP money, what would the purpose be?
Well, as you said, they got much more benefit from the government than just the TARP money. The Federal Reserve injected trillions of dollars into the economy.
The federal government went to extraordinary lengths to rescue the economy from the crisis which was largely caused by the actions of these banks. And, so, all of that money, the extra money which the government spends, the reduced tax revenue which the government is seeing, thanks to the enormous unemployment across the country, the huge fiscal deficit which has resulted from the biggest recession since the Great Depression, this is an enormous sum of money.
And the only section of the economy which is really making windfall profits right now is the banking industry. And, so, it makes sense to tax them higher to help cover that gap.
Bert Ely, as somebody who has followed the banking industry for a long time, is this a good idea?
It's a terrible idea.
First of all, the banking industry, while it's had some good profits in some of the lines of business, is still experiencing very substantial credit losses on credit card loans, mortgage loans, commercial real estate loans. The profitability of the industry is not that robust.
But, also, these — this tax, whatever form it takes, could have some significant unintended consequences, not just on the institutions, but on the economy as a whole. One of the things is, banks will take steps to minimize the tax, possibly even including moving certain activities and jobs out of the United States in order to avoid the tax.
Let me pick up on one of those points and come back to Felix Salmon.
And that is Bert Ely's points, that a lot of these banks, you say they are making money, but — but he's saying they're really not as strong internally as it appears that they are; they're really not in shape, in any sort of shape to take on these additional fees or taxes.
Which is, if you ask the banks, completely untrue, and if you ask Treasury, completely untrue, because they have repaid, all of them pretty much have repaid the TARP funds that they took from the government. And the only reason that the government let them repay that money is because they put their stress tests in. They made sure that these banks were well-capitalized, they were highly solvent, and that there weren't any problems with the banks.
And it's only in the wake of those stress tests, and it's only in the wake of the banks showing that they're rich enough and wealthy enough to be able to repay all of this money, that the government is saying, OK, now you can afford to pay us back a bit more.
What about that?
Well, the reason that the banks have been able to repay the money is because they have gone out and raised a lot of additional capital from stockholders. And much of that capital buildup is through capital they have raised, rather than earnings.
The banking industry still has a lot of losses to deal with. But, also, if the government gets all its money back from the banks, plus interest and other profits, then the question is, why should the banks be taxed additional amounts in addition to what they have already paid back.
You want to respond to that, Felix?
It's quite simple, really.
They should be — they should be paying back additionally because they caused additional damage to the economy as a whole.
The cost to the government of banking industry failure during the credit boom is much greater than just the $700 billion of TARP. It was trillions of dollars in total. And the banks, no matter how big this tax is, are only ever going to pay back a tiny fraction of that.
Yes, the — the reason we have had this crisis is because of numerous public policy failures that set us up for this. So, I think it's a little bit to lay all the blame for the recession on the banking industry, plus laying all these additional taxes on it may be harmful to the banks and harmful to the recovery.
Felix Salmon, a lot of people I have talked to today believe the administration is talking about this right now because there is so much public anger out there about the banks, the bonuses.
How much of that anger — you're somebody who follows the conversation around the country. How much of that anger do you think would be assuaged, would be addressed if something like this were to — were to be enacted?
I think the anger is deep. And I think that, here in New York, on Wall Street, a lot of bankers really don't appreciate how deep that anger runs across America.
I think that, if you implemented this kind of tax, if it was large, people would think that was right. I think that Americans would feel that made sense. I don't think it would make the anger go away.
Well, I think what you have to keep in mind is it's politics that are driving this, I think, as much as anything else, for exactly the point that Felix made, that there's a lot of anger out there. The polling numbers for the president are down. Democrats are concerned about losing seats in Congress.
I have to think that politics are driving much of this, rather than sound economics.
Felix Salmon, the point that Bert Ely made a moment ago about unintended consequences, that if some kind of tax or fee is slapped on these banks, they're inevitably, I believe he said, going to pass this on to their customers, to people they do business with.
Well, it depends how the tax is structured, really. If the tax is just a one-off windfall tax on the massive profits they made in 2009, if it's a tax on how big they were at the end of 2009, if it doesn't recur, then it's a sunk cost.
The economics of their business are the same going forward as they would be if there hadn't been a tax. And there's really no reason for them to pass that tax on to their customers. If the tax is going to continue to be enforced year in and year out in perpetuity, then, yes, they will probably pass it on.
Final comment here.
Final comment, it will be an ongoing tax. It won't be a one-off tax. And banks will pass it through to their customers and to the economy as a whole.
And, of course, we're talking about something that hasn't been enacted yet, that's only at the conversation level, but the administration is saying that they're seriously taking a look at this.
Bert Ely, Felix Salmon, thank you both.
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