Bankers Upset by Obama’s $100B+ Tax Proposal

Published February 15, 2010

Bankers across the nation are up in arms about President Obama’s tax proposal aimed at banks to cover government losses from financial bailouts. Obama proposed in January that banks with $50 billion or more in assets pay a tax based on their borrowings from government the government bailout funds. Federal Deposit Insurance Corp.-backed deposits are excluded because they’re already guaranteed and the banks pay for that insurance.

The tax could raise up to $117 billion over 12 years to cover expected losses from the Troubled Asset Relief Program, or TARP, which provided capital to banks, car companies, and insurer American International Group (AIG) during the financial crisis.

The U.S. Government Accountability Office said TARP lost $42 billion in the first year, which ended September 30. But it lost $30 billion each on auto industry bailouts and on AIG bailouts. It made $15 billion on bank investments.

That has bankers hopping mad that they’re being taxed to cover losses that didn’t come from their industry.

“My commitment is to recover every single dime the American people are owed,” Obama said in a press statement. “And my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people.”

52 Would Owe
Banks that get most of their capital from core deposits don’t get hit nearly as hard as banks that get funding from short-term borrowings, subordinated debt, or long-term debt. The goal, Obama said, is to “place its heaviest burden on the largest firms that have taken on the most debt.”

A study by Charlottesville, Virginia-based SNL Financial showed 52 companies would owe money under the tax proposal. Most are banks, but the list also includes insurers and brokerage firms.

Citigroup Inc. would pay $2.1 billion a year under the proposal. JPMorgan Chase & Co. would owe $1.9 billion. Two others—Bank of America Corp. and Goldman Sachs Inc.—would have to pay more than $1 billion a year. Morgan Stanley’s liability would fall just shy of $1 billion a year.

 But other banks consider it unfair that they would be taxed for losses they didn’t cause or on money they have already paid back. “It’s very illogical, and the bottom line is it’s not fair,” said Steve Wilson, chairman-elect of the American Bankers Association and CEO of Lebanon, Ohio-based LCNB National Bank.

With $734 million in assets, LCNB is nowhere near the list of banks that would owe money if the tax gets approved, but that doesn’t make Wilson much happier about it.

Some Paid Back Money
His bank took $13.4 million in TARP money and used it to make $65 million worth of loans. It paid the money back.

“And all we get is lambasted for it in the press,” Wilson said.

The $50 billion cutoff is “absolutely arbitrary,” he said.

“It’s a grab for more funds for an administration that’s drowning in debt,” Wilson said. “If you really want to get back the money that was lost, go after the auto companies.”

The tax would hit Pittsburgh-based PNC Financial Services Group Inc. to the tune of about $98 million a year before taxes.

“That’s a lot of money, but it’s not so bad for us,” PNC CEO Jim Rohr said. He noted others would be charged 10 times or more what PNC will have to pay.

Still, $90 million is a sizable chunk of change that Rohr doesn’t feel his bank should owe. He says banks seem to be scapegoats these days.

“It certainly doesn’t seem appropriate for us to pay for the car companies,” he said. “It has become almost sport to pick on the banks.”

Complaints Welcomed Sarcastically
But Steven Adamske, spokesman for the House Financial Services Committee and Chairman Barney Frank (D-MA), argues the banks gained far more from TARP than what they’re being asked to pay back now.

“The banks and Wall Street have benefited exponentially from the 2008 recovery act,” Adamske said. “If they’re able to come up with billions for bonuses, they should have no problem coming up with this [tax] money.”

The ability to recoup losses was written into the original TARP legislation, Adamske said. It stated TARP wouldn’t add to the national debt.

He welcomed the banks’ arguments against the tax, figuring people don’t have much sympathy for the banking industry.

“I hope Wall Street continues to [complain] about this,” he said. “It will get passed that much sooner.”

Passage Expected
Adamske said he thinks the bill will get passed. So does Erik Oja, a banking analyst at Standard & Poor’s.

“They’re serious about this,” Oja said. “I think something is going to get done.”

Bankers’ concerns about covering the auto industry’s TARP losses are legitimate, Oja said, but he added, “They’re never going to get that money back.”

FBR Capital Markets Corp. analyst Paul Miller says he doubts the proposal will pass the Senate. Instead he expects the government to require the largest banks to hold additional capital. That would guard against perceived risk to the financial system.

In a recent research note, Miller wrote he views “the Administration’s proposal as part of its strategy to penalize the largest financial institutions, stopping short of requiring them to dismantle.”

Steve Watkins ([email protected]) writes from Cincinnati.