Obama Weighs Tax on Banks to Cut Deficit

Obama Weighs Tax on Banks to Cut Deficit
By JACKIE CALMES
Copyright by The New York Times
Published: January 11, 2010
http://www.nytimes.com/2010/01/12/business/economy/12bailout.html?th&emc=th


WASHINGTON — President Obama will try to recoup for taxpayers as much as $120 billion of the money spent to bail out the financial system, most likely through a tax on large banks, administration and Congressional officials said Monday.

The president has yet to settle on the details, and his senior economic advisers are weighing a number of options as they finish the budget proposal Mr. Obama will release next month.

The general idea is to devise a levy that would help reduce the budget deficit, which is now at a level not seen since World War II, and would also discourage the kinds of excessive risk-taking among financial institutions that led to a near collapse of Wall Street in 2008, the officials said.

But the president also has a political purpose — to respond to the anger building across the country as big banks, having been rescued by the taxpayers, report record profits and begin paying out huge bonuses while millions of Americans remain out of work.

The administration previously rejected two ideas that have received much attention in recent months: a transaction tax on financial trades and a special tax on executives’ bonuses.

The most likely alternatives would be a tax based on the size and riskiness of an institution’s loans and other financial holdings, or a tax on profits.

Lobbyists for bankers, taken by surprise, immediately objected to any new tax. They said financial institutions had been repaying their portion of the bailout money in full, with interest. Losses from the $700 billion bailout fund — estimated to run as high as $120 billion — are expected to come from the automobile companies and their finance arms, the insurance giant American International Group and programs to avert home foreclosures, and the president is aiming to recoup that money.

“It is perplexing to us,” said Edward L. Yingling, president and chief executive of the American Bankers Association. He recalled that Mr. Obama recently had two White House meetings with bankers to urge them to provide more loans to credit-starved small businesses. But a tax, he said, would be “a hit on banks that will decrease their ability to lend.”

But the industry’s objections carry less weight at a time when Mr. Obama is under intense pressure to crack down on Wall Street. In coming days, big banks are expected to begin announcing huge bonuses for their top executives and traders. A bipartisan commission charged with reporting on the causes of the financial crisis will begin a two-day hearing on Wednesday with testimony from the heads of four big banks: Goldman Sachs, JPMorgan Chase, Morgan Stanley and Bank of America. Meanwhile, industry opposition continues to stymie the president’s initiative in Congress to tighten regulations.

“The president has talked on a number of occasions about ensuring that the money that taxpayers put up to rescue our financial system is paid back in full,” Robert Gibbs, the White House spokesman, said.

So has the Treasury secretary, Timothy F. Geithner, who has drawn criticism from both the left and the right as not being tough enough on Wall Street.

Representative Barney Frank of Massachusetts, the Democrat who is chairman of the House banking committee, said the president was required to seek recovery of any losses under the law that created the $700 billion financial rescue fund, known as the Troubled Asset Relief Program, in October 2008. The law did not spell out how to do so.

“I did know they were thinking about doing this and I encouraged them,” Mr. Frank said.

Mr. Frank and others in Congress said they did not know any details, and administration officials say no decisions have been made beyond the fact that a proposal will be in the budget. Mr. Obama has been meeting with Mr. Geithner and with Lawrence H. Summers, his senior White House economic adviser, to discuss options from the Treasury department. News of the decision to propose some kind of tax was first reported by Politico.

The 27-nation European Union called for a global transactions tax in December, and last November Prime Minister Gordon Brown of Britain proposed the idea at a meeting of the Group of 20 developed and emerging nations, saying revenue could be stockpiled to finance any future bailouts. But Mr. Geithner has said a transaction tax, on trades of complicated derivatives and other financial instruments, would simply be passed through to investors and other customers, and could put American companies at a competitive disadvantage.

Separately, Britain and France have proposed a large tax on financial executives’ bonuses. Last year the administration successfully opposed a House bill that would have imposed a substantial levy on executive compensation, and officials continue to argue that corporate shareholders, not the government, should determine pay policies.

Any fee that the president proposes is likely to exempt smaller banks, an official said. Community banks carry particular clout in Congress given their presence in nearly every member’s district.

“Those that caused this train wreck ought to be the ones to pay to clean up the mess,” said Stephen J. Verdier, an executive vice president at the Independent Community Bankers of America. “The community bankers are every bit as much the victims as the average taxpayer in all this, so any tax ought to be devised with those principles in mind.”

Losses from the $700 billion financial rescue are expected to be much less than initially feared, according to a Treasury report and government audit late last year. Besides banks’ repayment of their bailout money with interest, the government also has made money by selling the bank warrants that it held as collateral for its loans to the institutions.
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