Tomorrow, President Obama will announce the imposition of a "fee" tied to the liabilities of more than 20 of the largest U.S. banks. Politically, this new tax is surely a slam-dunk. Practically, the stated aim is a farce, at odds with the administration's stated desire to increase the availability of credit.
For an administration sometimes accused of being too cozy with Wall Street, the tax will produce both populist anti-Wall Street credibility and a new stream of tax revenue to spend. In Washington, there's just no downside to piling on Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), or Bank of America (NYSE:BAC).
Reportedly, the liabilities tax is structured to avoid the possibility that it'll be passed on to retail bank customers. We'll see soon enough, but the claim beggars belief. An increased cost of capital will be passed along to, say, mortgage borrowers, regardless of where in the financial system it is imposed -- whether on the end borrower, the mortgage-backed securities (MBS) trader, or the structured finance team that makes collateralized debt obligations out of those MBSes.
It's easy to imagine policy wonks in D.C. who believe they are clever enough to construct a firewall between the cost of lending and the cost of borrowing. But it's nearly impossible to imagine policy wonks who actually are that clever.
The silliest aspect of the affair is the idea that banks are being taxed (sorry, "paying fees") to cover the costs of bank bailouts. The largest banks, which account for the lion's share of TARP, have all repaid, or are in the process of repaying, their loans in full, along with handsome profits for taxpayers.
The losses, which are indeed enormous, come almost entirely from nonbanks, particularly the auto industry and AIG (NYSE:AIG). Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) also received massive assistance outside the TARP program.
A serious effort to restrain leverage would not take the form of a punitive tax (which is unlikely to effectively distinguish between prudent and speculative leverage), but through rules to be implemented with the judgment of the regulators who monitor large banks on a daily basis.
As it stands, this entire effort reeks of prudent regulation being trumped by political expediency.
