Tax big banks to death? Hold on a sec.

obama_money_100114.gi.top.jpgPresident Obama discusses his plan for a "financial crisis responsibility fee" -- a tax that may also hurt those not responsible for the crisis. By Paul R. La Monica, editor at large


NEW YORK (CNNMoney.com) -- The Obama administration wants to slap big banks and insurers on the wrist with a new tax. Oh wait, it's not a tax. It's a "financial crisis responsibility fee."

The move, which the White House says could cost the financial industry $90 billion over the course of 10 years, will probably satisfy some of the calls for a proverbial pound of flesh from look-at-me members of Congress and their angry constituents.

paul_lamonica_morning_buzz2.jpg
Should the federal government impose special fees on banks in order to recoup some of the bailout funds?
  • Yes
  • No
  • Not sure

According to the results of an admittedly unscientific poll on our site, 64% of the readers who responded to a question about the bank tax said that the government should impose some sort of fee on banks to get back bailout money.

I agree that financial firms that did act irresponsibly and then needed the government to prop them up should pay for their transgressions.

I also think that any claims from the big banks about how a tax would be bad for the economy also have to be viewed with several billion grains of salt.

"The banking industry will scream that if they're taxed more they will lend less," said Daniel Alpert, managing director with Westwood Capital, an investment bank in New York. "But they're not lending away, nor should they be. There aren't many attractive opportunities out there."

What's more, Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) appear set to disclose in the coming days that they have enormous pools of money set aside for 2009 bonuses and other compensation.

So the notion that these banks can't afford a tax is a crock. It's astonishing that some bank CEOs are still so tone-deaf that they don't truly seem to understand why the public is so angry. My seven-week-old son cries less than JPMorgan CEO Jamie Dimon.

Still, this tax might be going a bit too far. For one, many of the biggest bailout recipients have already paid off their debt.

Last June, Goldman and JPMorgan returned the $10 billion and $25 billion in funds they respectively got as part of the first round of the Troubled Assets Relief Program.

What's more, Goldman paid an extra $1.1 billion to redeem warrants issued to the government while the Treasury Department generated more than $900 million by auctioning off warrants that it received from JPMorgan.

Even some of the more troubled banks, such as Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), have paid back their TARP loans.

Of course, the combination of TARP, the AIG bailout (which helped Goldman in particular) and the Federal Reserve's policy of 0% interest rates and various lending programs all helped create an environment in which the banks were able to quickly return to some semblance of health.

Political 'Whac-A-Mole'

But the biggest problem with the proposed financial sin tax is that companies that didn't take a dime of bailout money in the first place may be forced to pay it as well. And that's ridiculous.

Sure, the White House is spinning the tax as a way toward reducing the massive budget deficit. But this is about retribution, plain and simple. The bailout rage has reached such a fever pitch in Washington that politicians seem to think that penalizing companies merely for being big is a good idea.

"It's very much a situation where politicians are responding to a public outcry, which understandably they have to do," said Denise Farkas, chief investment officer at Sigma Investment Counselors, a wealth management firm in Southfield, Mich. "But I feel like I'm watching a game of Whac-A-Mole. There is no comprehensive strategy other than to tax this and tax that."

According to Obama's proposal, financial institutions with more than $50 billion in taxable assets would be required to pay up to the IRS. So the four banks I've already mentioned should have to pay it as well as other big TARP recipients such as Wells Fargo (WFC, Fortune 500) and PNC.

It is not yet clear how many firms would have to pay the tax. The White House merely said that the fee would be a 0.15% charge assessed against covered liabilities, a number that subtracts insured deposits and Tier 1 capital from a company's assets. This implies that the banks with the highest amount of leverage would get hurt the most.

To that end, the administration said it expected 60% of the total revenue from the tax would "most likely" come from the 10 largest financial firms.

But if the sole determining factor of whether you are required to pay some sort of "financial crisis responsibility fee" in the first place is simply size and not actual culpability, then some big financial firms may also be unfairly penalized.

MetLife, the insurer that has a large bank holding company, would appear to fit the criteria set forth in the proposal. But MetLife did not receive any TARP funding and also passed last year's government-mandated stress test of large financial institutions. MetLife (MET, Fortune 500) was not immediately available for comment.

Hudson City Bancorp, a Paramus, N.J.-based bank cited frequently in this column for being a well-run, risk-averse bank that shunned TARP funding also has assets of more than $50 billion.

A spokesperson for Hudson City said the bank was not aware of whether it would be required to pay a "financial crisis responsibility" tax. Based on the bank's most recent quarterly numbers though, Hudson City (HCBK) seems to have what the White House would define as about $31 billion in covered liabilities.

Using the White House's proposed fee, Hudson City could be on the hook for $47 million in taxes. But why should Hudson City have to pay for the sins of its bigger banking cousins headquartered on the other side of the Hudson River?

It gets worse. The government is exempting several other big beneficiaries of federal aid who also share some blame for the financial crisis.

Mortgage giants Fannie Mae and Freddie Mac, which are now essentially government-run, won't have to pay the tax. Neither will the two bailed-out automakers General Motors and Chrysler. The thought is none of these four companies are financially viable enough to afford such a tax.

That may be true. Still, doesn't that also mean they are getting a free pass even though they also share a portion of "financial crisis responsibility?"

I'm all for making the guilty pay. But this tax runs the risk of making all banks pay for the crime of merely being a bank or insurance company. And that's not fair. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.12%4.18%
15 yr fixed3.25%3.21%
5/1 ARM3.48%3.32%
30 yr refi4.18%4.17%
15 yr refi3.30%3.21%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,042.90 -28.32 -0.17%
Nasdaq 4,493.39 -12.46 -0.28%
S&P 500 1,972.29 -5.51 -0.28%
Treasuries 2.51 0.02 0.68%
Data as of 9:05pm ET
Company Price Change % Change
Ford Motor Co 14.79 -0.32 -2.12%
Bank of America Corp... 17.05 0.04 0.24%
eBay Inc 56.63 3.97 7.54%
Apple Inc 100.75 0.64 0.64%
General Electric Co 25.62 0.20 0.79%
Data as of 4:00pm ET

Sections

CNNMoney's Italian-American investing correspondents did a taste test of Olive Garden's food. They agree with hedge fund Starboard: It's not very appetizing. More

Even limited air operations could cost up to $4 billion a year, says a think tank, while large ground forces could cost $1.8 billion a month. More

Microsoft showed off the new Windows 10 at an event for business customers Tuesday. More

On Wednesday, 17% of First Green Bank's 66 employees will get a raise under the company's new "living wage" program. The guarantee: At least about $30,000 a year. More

This mom of four only makes $29,000 a year and is losing $400 a month because the state is garnishing her paycheck over a debt. Now she is about to be evicted from her apartment. More



Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.