So yesterday’s big news is the new Financial Crisis Responsibility Fee, the FCR fee or f****r fee as the bankers are calling it. This is Obama’s big idea to get back lost TARP funds, by introducing a tax of $1.5 million per billion dollars of liabilities on a bank’s balance sheet.
The aim is to raise $117 billion to make up for the losses during the financial crisis. The way it will work is that the banks pay this 0.15% on liabilities and, according to Goldman Sachs, there are around $5.5 trillion of liabilities on American banks’ balance sheets so that’s around $8 billion per year. The tax will apply for ten years, until 2020, or until the TARP fund losses are repaid.
The fee will be applied to only the largest banks, those with more than $50 billion worth of assets, and 60% of the tax will be paid for by the largest banks: JPMorgan, Citi, Bank of America, Wells Fargo, Goldman and co. In fact, the biggest banks will be paying about $2 billion a year for this tax.
There’s also about $1 billion a year that will be paid by UK banks Royal Bank of Scotland (who own Citizens and Charter One Banks), HSBC (who own Household) and Barclays (who bought the US operations of Lehmans).
Sounds bad, but it’s not so bad.
US banks made $250 billion in earnings last year, so paying back up to $10 billion a year in tax ain’t so bad. In fact, I was amazed to find a figure that states that Goldman Sachs made $100 million a day in earnings last year every day for over 200 trading days. So a billion here or there in taxes ain’t so bad, especially if you’re paying billions in bonuses and annoying everyone.
The FCR fee is stirring stuff therefore, and very populist as it ensures that Barack Obama “recovers every single dime the American people are owed”, and hits at the heart of the anger everyone has with bankers making “massive profits and obscene bonuses”.
In some ways, it’s a good idea. It targets leverage and borrowings that banks tap into in the wholesale markets, which is where Lehmans and Northern Rock got scuppered and where Goldman Sachs and Morgan Stanley plough their trough.
The FCR fee also positions itself as the insurance fee which the banks should have paid to get themselves bailed out. They didn’t pay any insurance but then found they were too big to fail so the Fed insured them. This is now payback time.
But it won’t work.
First, it hits at the banks but the banks have paid back TARP. $165 billion of TARP funds were repaid by US banks last year, with an average return to the US taxpayer of an 8% yield. That’s why the Fed made a $45 billion profit last year, through bond purchases and interest on the emergency loans made to financial institutions. It was General Motors, Chrysler and AIG that lost the $120 billion of funds that Obama wants to recoup.
Second, the banks will just pass on the cost of the tax to their customers and investors. Jamie Dimon, CEO of JPMorgan, made the comment straight off that “all businesses pass costs on to customers”, and it is highly likely that the banks will find some way to hide this tax in the costs of doing business. The result is that the proposed tax will be rejected by Congress, who see any tax on the taxpayer as being untenable. The tax has to be directly on the bank.
Third, Geithner ruled out a Tobin Tax on bank transactions at the G20 Finance Ministers summit in Gleneagles last November for the reasons outlined in point two above. The trouble is that the FCR fee is a variation of a Tobin Tax and needs to be better thought out. Obama had and has until 2013 to find a way to get the lost TARP funds repaid, and so he doesn’t need to do something this fast or ill conceived.
Finally, this does not address the two biggest issues: bankers’ bonuses and being too big to fail.
Obama claims it gets at "massive profits and obscene bonuses" … how? I don't see it.
If these are the major issues that lie at the heart of the post-crisis bubble of media and public bile, then these need to be addressed and the FCR fee doesn't do it. The FCR fee purely repays TARP.
In fact, if bonuses and too big to fail are the core issues then, as mentioned the other day, these issues need to be addressed through a G20 agenda, not a unilateralist position whether it be in the UK, USA, France or elsewhere.
Therefore, it is far more likely that the FCR fee will be rejected by Congress and Geithner and Obama end up working with Barnier, Darling, Brown, Sarkozy and company on clawbacks and taxes on banker’s bonuses, along with a variation of Glass-Steagall to bring back a return to ‘narrow banking’. In other words, split the risky investment markets from the retail depositors.
This last point is the key act forecast to happen over the next year or so, and is far more likely to be operable and implementable than a FCR fee.