- The Washington Times - Friday, January 15, 2010

President Obama on Thursday proposed a new tax on the nation’s biggest banks and financial firms that he said would recoup taxpayer bailout funds by forcing Wall Street firms to give up lucrative executive bonuses - a notion that several economists described as little more than a pipe dream.

In a populist tongue-lashing aimed at firms he said were to blame for the financial meltdown, Mr. Obama said the “financial crisis responsibility fee” will ensure taxpayers recover the money they pumped into the Troubled Asset Relief Program (TARP) by raising $90 billion over the next decade.

“My commitment is to recover every single dime the American people are owed,” Mr. Obama said of the new fee, which still must be approved by Congress.

The president said his “determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people - folks who have not been made whole, and who continue to face real hardship in this recession.”

Economists say the tax may recoup bailout money doled out under TARP, but that it was not likely to cut into executive compensation packages.

“They won’t take it from the bonus pool; you can be sure of that,” said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at the Boston University School of Law.

A leading financial industry group did not directly attack the fee, but called Mr. Obama’s proposal premature. A number of banks have already repaid some or all of their bailout funds.

“We knew that the industry could be on the hook for any losses, so we’re happy to pay our share for the losses - that being said, we don’t anticipate there are going to be any losses,” said Scott Talbott, a senior vice president at the Financial Services Roundtable. “To impose a tax now before we even know what the loss is, if any, will hinder the recovery effort and reduce banks’ ability to lend.”

And Rep. Tom Price of Georgia, chairman of the House Republican Study Committee, accused the administration of sending a mixed message with the new tax proposal.

“It seems this tax increase is driven more by revenge than recovery,” Mr. Price said.

Mr. Obama will formally send the proposal to Congress next month when he issues his annual budget.

The tax would target the liabilities of all banks with more than $50 billion in assets - including those that didn’t accept TARP money as well as those that accepted it and paid it back. It would not apply to the auto industry or to Fannie Mae and Freddie Mac.

The White House bristled at the idea banks would pass the costs of the fee onto consumers, arguing they would do so at their peril and making clear the administration’s preference that the money come from reduced executive bonus payments.

“I think it strains your credibility to somehow believe or even make the case that this is something you have to pass on to your customers if you’re setting aside somewhere on the order of 10 times that amount of money just to pay out bonuses,” White House press secretary Robert Gibbs said.

Mr. Hurley said that Mr. Obama is “heading in the right direction,” but argued that a fairer way of holding banks accountable would be to identify those institutions that have been deemed “too big to fail” - and thus have lower borrowing costs since creditors assume the government will back them up - and charge them a “risk premium.”

“You identify them, you measure it and then you charge them, and you’re charging the right people for the right reasons,” he said.

Peter Morici, a professor at the University of Maryland Robert H. Smith School of Business, said Mr. Obama would have levied a tax directly on excessive Wall Street bonuses if he were really serious about stopping the practice.

“This is a fig leaf. The president is screaming outrage while he’s really not doing anything about this,” Mr. Morici said. “That tax is going to collect $90 billion over 10 years when [Wall Street firms] just paid out $140 billion in bonuses.”

Mr. Morici said the only way to discourage such payments is a direct tax like the one proposed in Britain that levies a 50 percent penalty on hefty bank bonuses themselves.

Others say the fee could backfire, inhibiting the nation’s overall economic recovery.

“What this tax is going to do is actually drain more equity out of these banks and that will have an impact on the recovery, that will have an impact on one of [the administration’s] other goals, which is that the banks are lending again,” said Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University. “If you can transfer the tax and push it on to other people, you will.”

Under the law that created TARP, Mr. Obama is required by 2013 to submit to Congress a plan to recover any deficits from the program. The administration said the bank fee proposal underscores his commitment to taxpayers, arguing there is no reason to wait until the statutory deadline. The White House estimates the current TARP tab at $117 billion but said it expects that number to change.

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