Handicapping the Odds for Obama’s ‘TARP Tax’

By:  Cyrus Sanati
The Deal Book from The New York Times

How likely is Congress to approve President Obama’s proposed tax on about 50 large financial institutions to recoup billions of dollars in losses from the government’s banking bailout? Views vary from Wall Street to Capitol Hill.

Banking analysts at FBR Research, for instance, argued in a note to clients on Thursday that the bank tax might never see the light of day because of stiff opposition in the Senate. But Representative Barney Frank of Massachusetts, the Democratic chairman of the House Financial Services Committee, told DealBook that he would be “shocked” if any Democratic senators opposed the plan.

The FBR analysts noted that their “sources on Capitol Hill” indicate that the “financial crisis responsibility fee,” which is being called the “TARP tax” after the Troubled Asset Relief Program, had a very low probability of passage in the Senate, as they say nearly all Republicans and a “sufficient number” of Democrats would most likely vote against the measure. While they acknowledge that the proposal has a higher probability of passage in the House of Representatives, a move that may result in some negative headline risk for large financial institutions, it is likely to be tabled by the Senate.

The FBR report stopped short of naming any Democrat senators who would go against the president and vote down the measure.

Mr. Frank thinks otherwise. He endorsed the bank tax plan, telling DealBook that “it was a very good proposal,” and that if any senator opposed the legislation, “they greatly misunderstand what the public thinks about them.”

“The notion that senators would not want to recover the TARP money,” does not make sense, “especially given that the conservatives have been the most critical of the TARP,” Mr. Frank said. “I think this will pass with strong support.”

Most senators contacted by DealBook were waiting to see the president’s proposal in writing before issuing any statements for or against the proposal. But Senator Bernard Sanders, the Vermont independent and fierce critic of Wall Street, was quick to endorse the bank tax plan.

“The president’s proposal is a strong step in the right direction,” Mr. Sanders told DealBook. “Wall Street must pay back every last dime that financial firms and other corporations received from the American taxpayer.”

The bank tax plan was also endorsed by Representative Paul E. Kanjorski, Democrat of Pennsylvania, who late last year introduced a controversial amendment to the financial overhaul bill that would give the government the power to break up financial institutions that it believed were “too big to fail.”

“It is time for Wall Street, whose reckless actions led to the credit crunch that has affected all Americans, to take responsibility for their actions and ensure that all of the money that was used to ensure their survival is returned to the taxpayers and not added to the debt of the United States,” Mr. Kanjorski told DealBook.

“Furthermore,” he said “we can ensure that a small portion of profits derived from the taxpayers’ intervention are returned to the taxpayers and not distributed to employees in massive bonuses.”

The original TARP legislation passed in 2008 does call for some remedy for recouping money lost in the bailout from financial institutions by 2013, so some sort of tax or levy will eventually be laid on the industry; it is just a question of what form it will take and when it will be put into effect.

The tax proposed by the Obama administration would amount to about $1.5 million for every $1 billion in bank assets subject to the fee, which equals a bank’s total assets, excluding its Tier 1 capital — its core finances, which include common and preferred stock, disclosed reserves and retained earnings. That is then multiplied by the 15-basis-point assessment rate. The tax would not apply to a bank’s insured deposits from savers, for which banks already pay a fee to the Federal Deposit Insurance Corporation.

The goal is to cover the expected cost of the TARP, which is currently estimated to be around $117 billion. That number could change drastically based on whether the TARP money still outstanding ever makes it back into the government’s coffers. So far all, the large banks that accepted TARP money have paid it back in full, except Citigroup.

Based on the tax formula, Goldman Sachs and Morgan Stanley are likely to pay the highest assessments because of their reliance on wholesale funding, the analysts at Concept Capital said in a note to clients on Thursday. But they stopped short in calculating how much the tax would cost the two firms, saying it would be at least as much as some of the big banks.

The Concept Capital analysts did, however, calculate the annual impact on the bottom lines of other large banks, based on their third-quarter capital numbers. The tax would cost Bank of America $1.7 billion; JPMorgan Chase nearly $2 billion; Citigroup nearly $2.2 billion, and Wells Fargo just $578 million — illustrating that bank’s small investment banking and trading footprint.

Morgan Stanley and Bank of America declined to comment on the president’s proposal. A spokesman for JPMorgan also declined to comment, but pointed to a statement made on Tuesday by Jamie Dimon, its chief executive, in which he said that “Using tax policy to punish people is a bad idea.”