- The Washington Times - Thursday, January 21, 2010

President Obama tailored his proposed tax on banks to tap into public anger at Wall Street, yet the $117 billion raised would be used mostly to pay for losses from the bailout of Detroit auto companies, insurance giant American International Group Inc. and a social program to help homeowners facing foreclosure.

Big Wall Street firms such as JP Morgan Chase & Co., Goldman Sachs and Citigroup Inc. would pay the lion’s share of the tax, even though those banks have largely repaid their bailout funds, plus interest and dividends, delivering double-digit yields on the Treasury investments.

By contrast, AIG, General Motors Co., Chrysler LLC and the thousands of homeowners receiving more lenient terms under Treasury’s loan modification program are expected to pay back little, if any, of the $210 billion they received from the Troubled Asset Relief Program (TARP), leaving the bailout plan with big losses.

AIG received $70 billion in bailout aid, some of which arguably helped pay Goldman and other big banks that received payouts on their credit insurance contracts.

General Motors, Chrysler and their financing arm, GMAC, altogether have received more than $90 billion. GM made its first $1 billion repayment last month on $11 billion of loans.

A program that has designated $50 billion to help defaulting homeowners has produced few successes and no revenues for the Treasury.

Although the tax on banks to pay for losses from other aid programs may make political gains in an election year, analysts say, it raises issues of fairness.

“Banks feel ill-used by the tax,” said David Wyss, chief economist at Standard & Poor’s Corp., “since most of the losses have been in the auto, insurance and mortgage sectors, while bank moneys have been paid back.”

He noted that prospects for such a tax have contributed to declines in the stock market, including a 122-point drop Wednesday, because bank profits had been major sources of gains for investors.

The market also was hurt Wednesday by disappointing earnings at Morgan Stanley and a warning from Bank of America Corp. that the economic environment “remains fragile,” despite improved earnings at the bank. Citigroup reported another big quarterly loss on Tuesday, attributed in part to its partial payback to the Treasury.

Because of the paybacks, only $83 billion of the $205 billion that Treasury originally provided to banks remains outstanding. All of the big banks except Citicorp have fully repaid their obligations. Banks with more than $50 billion in assets are targeted for the tax, which is designed to cover losses in the bailout fund over a 10-year period.

AIG, which received $70 billion from TARP and $110 billion from the Federal Reserve, received bailouts that far eclipsed that of any bank. The insurer, however, would pay a tiny share of the tax, though it has failed to make its regularly scheduled dividend payments to the Treasury.

Peter Morici, a business professor at the University of Maryland, called the tax proposal “demagoguery” and “a flagrant attempt to confuse the public” about who is responsible for losses under TARP.

“The president misused the TARP money by investing in GM, Chrysler and GMAC, and that is where the government will lose money,” he said. “If President Obama were to tax anything to recoup lost TARP funds, it should be cars. However, that would anger the UAW, staunch supporters of the president and Democrats running for Congress.”

The White House, Congress and the American public continue to turn their anger against big Wall Street banks, ironically because they were able, with the government’s help, to recover from the crisis quickly. Last year, these banks posted big profits and provided a record $150 billion of bonuses to their executives and traders.

Many of those profits were earned on highly leveraged and speculative trading activities that took advantage of rapidly rising stock and commodity markets as well as low-interest loans from the government.

The Obama proposal aims to tax leveraged trading activities, even though those were what enabled the big banks to quickly repay the Treasury and exit the bailout program last year.

“Though not all of the TARP money given to the banks has yet to come back, the government will get it all back with a significant profit,” Mr. Morici said.

He said the proposal serves the president’s political purposes by averting plans in Congress to tax the big bank bonuses that have provoked the strongest public outrage. Britain and France chose to directly tax lavish bank pay, and some legislators contend that would be the best way to recoup U.S. funds as well.

“The president’s tax would let the bankers, who contribute mightily to campaigns of congressional Democrats and President Obama, keep their bonuses,” preserving the pool of funds for campaign donations, Mr. Morici said. “It’s all very insidious.”

Frederick Cannon, an analyst at Keefe, Bruyette & Woods Inc., said the bank tax has a good chance of passing Congress, although it may be narrowed to ensure that smaller banks that did little to contribute to the crisis aren’t forced to pay.

As drafted, the proposal would force about 40 smaller banks, such as PNC and BB&T;, to help pay the tax, the Keefe firm estimates.

Mr. Cannon expects some congressional lawmakers to offer a sympathetic ear to banks’ concerns about having to pay for bailouts unrelated to their own.

In particular, “we expect a vigorous debate over whether losses sustained by the auto companies” should be covered by the bank tax, he said.

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