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Originally published Saturday, January 23, 2010 at 10:04 PM

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Commentary: Obama's proposed bank tax short on penalties, deterrents

In almost every criminal case — at least the ones that get ripped from the headlines and end up on "Law & Order" — there's a point when the D.A. offers a plea bargain.

Los Angeles Times

In almost every criminal case — at least the ones that get ripped from the headlines and end up on "Law & Order" — there's a point when the D.A. offers a plea bargain.

Everyone knows how this works: The prosecutor tries to impose the harshest deal possible, given the holes in his case; the defendant, knowing he's getting off easy, faces the music and shuts up about the extenuating circumstances.

So why are President Obama and the banking industry misplaying their roles in the debate over the administration's new bank tax?

To hear the bankers squeal, you'd think they were being sent to Guantánamo for failing to get the taillights fixed on their limos; they're even thinking about challenging the tax on constitutional grounds.

To hear the president brag, you'd think he's making the taxpayers whole after an elemental breakdown of the financial system.

He says the tax would generate about $9 billion a year for at least 10 years, which might still be shy of the projected $117 billion hit the taxpayers' will take from the $700 billion Troubled Asset Relief Program, or TARP (i.e., the bank bailout). It will apply only to financial institutions with more than $50 billion in assets, or about 50 big financial companies.

Both sides are deceiving the public. Here's the reality: The proposed tax is both fully justified and not remotely as big as it should be.

Obama's tax proposal, unveiled Jan. 14 (a week before he announced proposed new bank rules limiting their size and investment risks, sending the stock market tumbling), would cost the industry a pittance. Consider JPMorgan Chase, a big bank with hands no cleaner than the rest of the industry.

"In our investment bank, we should have been more diligent" about the risks of highly leveraged corporate buyouts were financing, Chase CEO Jamie Dimon recently told the Angelides commission (officially known as the Financial Crisis Inquiry Commission) investigating the financial crisis. He explained his bank figured, wrongly, that there'd always be another boob around to take the paper off its hands; for example, Chase "assumed too stable a market appetite for these types of loans."

Dimon also said Chase "misjudged the impact of more aggressive underwriting standards" in mortgages. Translation: "We shoveled ridiculous loans out to homebuyers and they went south."

Obama's proposal would charge Chase roughly $1.5 billion a year. In 2009, Chase collected that much in revenue every three to four working days. Did Chase's "assumptions" about the buyout and mortgage markets not cause more than $1.5 billion in economic damage to the country? I'd say its ledger is still in the red.

Fundamental error


Obama's fundamental error is describing the tax as a repayment of TARP. The only conceivable explanation for this characterization is that he believes it makes the tax easy for the average American to understand.

But that approach has given the bankers an excuse to whine about life's unfairness. They point out the companies facing the biggest tax bite, such as Goldman Sachs and Bank of America, have already repaid their TARP bailouts at a profit to the taxpayer. Moreover, companies likely to generate big TARP losses, such as General Motors and Chrysler, won't pay any tax.

So in those terms, the bank tax doesn't make sense.

"It doesn't recoup TARP where it's being lost," Peter Morici, a business professor at the University of Maryland, told me. "It isn't really protecting the public in any way. And it doesn't fix the banks."

In any event, TARP was only one part of the bailout. The government indemnified several big institutions against losses when they absorbed other failing companies. Chase, for instance, got a $30 billion insurance policy on assets of Bear Stearns, which it took over in March 2008.

Money-market deposits

The feds also insured money-market deposits and made billions in other commitments, all to shore up a financial industry that was coming apart at the seams.

It's also proper to note that while we the taxpayers turned a profit on the repaid TARP investments, which were made as purchases of bank preferred shares, we didn't make out nearly as well as private investors who injected capital at the same time.

"We made an average annualized profit of about 15 percent," says Linus Wilson, a finance expert at the University of Louisiana who has been tracking TARP.

"Private investors got a 44 percent return — so we overpaid for the stock at the beginning."

In other words, we got rooked.

Rather than a repayment of the bailout, the tax should be thought of as a penalty and regulatory fee. In the first sense, it punishes the financial sector for the behavior that forced the government to place more than a trillion dollars of taxpayers' money at risk and discourages the same behavior in the future.

More important, it's a charge for the costliest government bailout of all — the one that hasn't happened yet.

Bank CEOs, investors, customers and regulators all know the lesson of the last financial meltdown is that the biggest banks will be guaranteed against failure in the next one.

As TARP's congressional oversight panel has observed, the markets are convinced that "the federal government will inevitably rush in to rescue financial institutions deemed too big to fail."

No kidding.

The failure of an institution with $750 billion or more in assets — six companies were there as of last September, led by Bank of America, Chase, and Citigroup with $2 trillion-plus — isn't economically sustainable. So of course they'd be bailed out.

Raising capital

This implicit guarantee allows big institutions to raise capital at lower prices than investors and lenders would otherwise demand. This gives them a huge advantage over smaller banks, which are not likely to be rescued. It encourages them to take greater risks with the money — after all, what's the downside of even insane risk-taking if it carries no existential threat?

In that sense, the tax will help level the playing field by essentially raising the cost of capital for the larger banks.

The banking lobby seems to think this is an argument against the tax. In fact, it's the opposite. The goal is to discourage big banks from getting bigger, which only allows them to put the taxpayer over a bigger barrel. If they try to pass the tax on to customers, thus driving more business to smaller banks, so much the better.

The banks' opposition to the tax is another indicator of their absolute refusal to accept blame for the economic catastrophe the rest of us are still living with.

Executives and bonus babies may be partying like it's 2007, but not shareholders: If you've had BofA stock for the last three years, you've become 65 percent poorer. Meanwhile, your home may be worth a lot less than it was then, and you're more likely to be unemployed.

And the banks think we're being unfair to them?

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