Financial Times Editorial Comment: US government to reap the windfall

Financial Times Editorial Comment: US government to reap the windfall
Copyright The Financial Times Limited 2010
Published: January 12 2010 22:35 | Last updated: January 12 2010 22:35
http://www.ft.com/cms/s/0/d0f19648-ffb5-11de-921f-00144feabdc0.html


One characteristic unites the American left and right: simmering anger about the bank rescues. This occasionally boils into rage as financial institutions that were propped up with public money announce megabonuses. The spectacle will unfold in the coming weeks. So a White House plan to recoup the costs of the financial rescue with a tax on banks will be popular. Executed properly, it would also be wise and fair.

The troubled asset relief programme, the $700bn fund used to implement the bank rescues, is now estimated to have lost $120bn, though this number is expected to fall below $100bn in the medium term. The loss, whatever it turns out to be, is the total that the administration intends to claw back with a levy on large banks.

Banks, however, were not the only beneficiaries of the rescues, nor the only source of Tarp losses. As little as half of the eventual losses may turn out to be rooted in Tarp equity injections into banks and the guarantees of their liabilities. The cost of mortgage modification schemes and loans to carmakers will account for most of the balance.

The costs of the Tarp, therefore, should not be carried by the banks alone. Natural justice and political expediency require that the banks pay for the capital and bond insurance schemes they employed. This alone would amount to a massive bill. But banks should not have to pay for motor industry bail-outs.

The government must now plan to avoid being rushed into expensive crisis bail-outs in future. So, most of all, banks must be made safe to fail. Principally, bank insolvency procedures and capital structures should change so that debt can easily be turned into common equity in a crisis.

Even then, however, some institutions at the centre of the financial network may enjoy implicit state guarantees. Ideally, the state would charge for this insurance. The Financial Crisis Inquiry Commission, taking its first hearings today, should consider how such a policy might work. After all, aside from the financial benefits, forcing banks to pay premiums that reflect the riskiness of their strategies and the threats that they pose to other institutions would encourage safer banking.

This approach would encounter formidable practical obstacles. Markets were unable to price the risks of systemic crisis usefully. Government is unlikely to prove better at the arithmetic of mass insolvency. But taxpayers should not continue insuring the bonds of banks for free.