Strafing the Banking Industry

Obama Turns the Tables

New levy on profitable banks is outrageous
In an internal paper and presentation I criticized the Obama Administration's punitive action against profitable financial institutions, its doubtful morality and its logic. Whilst popular with an incited public (and electorate), Obama's war directive against the nation's most successful banks comes just a year after the near-collapse of the international financial system, and possibly just a year ahead of the next, even more abysmal crisis looming.

“I did not run for office to be helping out a bunch of fat-cat bankers,” Barack Obama recently declared. On Thursday January 14th he drove the point home, unveiling a special levy on large financial institutions to cover losses by taxpayers on the Troubled Asset Relief Programme (TARP). The “Financial Crisis Responsibility Fee” will snare around 50 banks and insurers with assets of more than $50 billion — 35 American institutions and 15 or so domestic subsidiaries of foreign firms. Each will pay 0.15% of its eligible liabilities, measured as total assets minus capital and deposits (or, for insurers, policy reserves). Investment banks with few deposits, such as Goldman Sachs and Morgan Stanley, will be hit much harder than commercial banks, as they only recently started accepting deposits under new legislation that "grants" them full commercial banking licences.

The fee will last a minimum of ten years, and longer if that is necessary to recoup the full cost of TARP. In a statement Mr Obama promised to “recover every single dime the American people are owed". In fact The Treasury expects the fee to raise $90 billion over that period, and that this will be sufficient to cover the final bill—though its most conservative estimate is a loss of $120 billion. Officials argue that, far from springing a surprise on banks, they are following the letter of the law that created the TARP, which called for the bail-out’s costs to be recouped from the financial sector by 2013.

The politics of the levy are clear. As banks’ pockets bulge again, they grow less popular. According to a Bloomberg poll conducted in December, 64% of Americans vindictively think bailing them out was a mistake. Legislators are under pressure to respond to this ignorant anger, especially those facing mid-term elections in November.

Politics is not the only, but most driving motive. Hitting the giants addresses a genuine worry about banks whose size poses systemic dangers. Many, however, expect that the banks will simply pass the extra costs to customers. Another concern is that the levy will strip banks of funds that could otherwise be used to bolster their capital and to grant loans to consumers and industries. Up to $1 Trillion of loans could be withheld over ten years, depriving a fragile economy of desperately needed funds to gain momentum.

The timing of the fee is not coincidental but viciously calculated. Bonus season is looming on Wall Street. America’s big banks are girding themselves for a storm of abuse when they unveil their annual results and compensation, starting on Friday with JPMorgan Chase. They were vilified for vast losses in 2007-08 but the problem now for the pace-setters is voluminous profits. The rebound in capital markets has pushed revenues back towards pre-crisis levels, and compensation pools with them. Goldman Sachs is expected to fork out $18 billion for 2009, not much less than its record payout in 2007. This is awkward, given the helping hand-outs banks got from the taxpayer, although all major banks have repaid rescue loans plus interest, ahead of time. Goldman Sachs did not even receive any crisis loans.

Banks are not taking the issue lightly. They are addressing skewed incentives by, for instance, paying a bigger share of bonuses as deferred shares, with a greater opportunity to claw this back if trades go wrong. More importantly for their public image, banks are lowering their “compensation ratios”. Investment banks used to give half their net revenues to employees. This year it will be closer to 40%.

Even so, the absolute numbers will still look indefensible, especially to the one in ten Americans workers without a job. That leaves the banks destined to please no one: the public will see the pay numbers as disgracefully large and employees as disappointingly low. The mood on Wall Street is part frustration (that the cut in compensation ratios has failed to soften hearts); part fear (over possible defections to hedge funds); and part anger (over what financiers see as the Obama administration’s fanning of anti-bank sentiment).

All three emotions were heightened this week when Andrew Cuomo, New York’s attorney-general, demanded detailed information on pay policies from big banks. The Federal Deposit Insurance Corporation, meanwhile, said it would use pay structures in calculating contributions to its deposit-insurance fund. And compensation featured heavily when bosses of four big banks testified to the first hearing of the Financial Crisis Inquiry Commission.

But it is the new tax that really has bankers foaming at the mouth (in private, of course; they have learned not to slam such things in public). They complain that its design is fundamentally unfair, since it hits institutions that have settled their debt to the taxpayer: most big banks have already repaid their TARP funds, with interest. The bulk of the losses will come at American International Group (which is covered by the fee) and carmakers (which are not), along with spending for mortgage-modification programmes. Freddie Mac and Fannie Mae - the worst cases of self-triggered financial doom and taxpayers' rescue - are also excluded from the new levy.

Such bleating might ring hollow. With banks paying fat bonuses so soon after a gut-wrenching rescue of the financial system, they themselves are largely to blame for the yawning disconnect with the beleaguered taxpayer. Like him, they are set to get a taste of what it is like to cover someone else’s losses. Obama's financial policies have descended into a primitive tit-for-tat, eye-for-an-eye lashing.