Thursday, January 14, 2010

Bank Tax - Right Policy Wrong Reasons

Today President announced details of how Fed will levy around $90 to $120 Billion tax on around 50 banks and financial companies over the period of 10 years. One would say it is good to know that White House has at least started to address some of the 'political imbalance' it perpetuated for this long. One can also understand that White House wanted to wait till banking recovers to start talking about this levy. Of course, one suspects the real reason is White House is determining now that it is untenable politically to let banks go free besides the looming international pressure in months to come. Whatever is the reason, it is a good first step and Americans will be glad to hear the details.

However, there is one incorrect thing which this administration is touting of the flavor of 'we fight Al Qeda in Iraq to stop terror attacks back home' i.e. plain and simple political lying or classic 'straw man argument'. Administration is arguing that it is charging banks because it wants to recoup all the losses of TARP presumably caused by banks. Who are they kidding? Banks have returned most of the money with interest and there is no possibility of banks creating losses on their direct capital investment under TARP. Those bank equity / preferred shares investment in banks have been around one third of TARP total.

The losses in TARP are due to investments in AIG, GMAC, Fannie Mae, Freddi Mac, GM and Chrysler; meaning all the non-banks in stricter sense. It is understandable that:
- first of all, all these bail out to above mentioned companies are justified and no one is taking Fed at fault for that (except AIG),
- it is also the case that these losses are partially contributed due to recession apart from 'poor management of these companies and political interface'; and
- finally it is also clear that these companies will not be profitable for long time to come (GM could be in a year or so).

This means why is Administration forwarding 'rob the Peter to pay Paul' type of argument for applying Bank fees? Just because Banks robbed public, i.e. some one else did to pay for themselves (i.e. executives and top traders); does not mean Administration advance the same argument in justifying Bank Fees. Financial Times rightly argues along these lines in it's Editorial.

It is precisely this nauseating, condescending attitude of Politicians whereby they assume that Public needs some simplistic arguments to understand so called complex issues is the real problem of politics in this country. We expect President Obama to talk 'straight' with Americans. Public is quite ahead in understanding issues, it is only Politicians who are refusing to face the reality.

We want Administration to defend Bank fees for what those are for:
- as NYT Editorial pointed, the general cost of the Great Recession caused by these greedy banks is quite high than whatever fees they would pay over a decade (homes lost, jobs lost, assets evaporated, retirement gone, etc.);
- we need ways and means to stop future leverage and these fees on 'liabilities and leverage of banks' is one of the many steps needed; and
- it is a way to replenish part of budgetary deficit at this juncture when 'money is short' for the Fed.

Actually, as NYT Editorial and many others have pointed out, such fees only address one part and it does not address the issue of 'how to stop bonuses' to bank executives who do not deserve those as well as how to stop continued risky compensation practices at these banks.

We want Administration and President Obama to support these fees for right reasons and not some hypothetical / wrong reasons which they want to 'stuff' gullible public. No one is trying to shield bad bankers here. However, let us be straight and honest here.

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