Banks should pay their share

Ultra-profitable banks shouldn't fight new tax or pass it on to customers

Published: Tuesday, January 19, 2010 at 4:30 a.m.
Last Modified: Monday, January 18, 2010 at 6:10 p.m.

When President Barack Obama unveiled his proposal Thursday for a new tax on big banks, he said what many Americans have been thinking: "We want our money back."

Bank after bank has announced it will pay massive bonuses to employees recently, most notably Goldman Sachs, which has set aside $16.7 billion for employee bonuses this year.

What Obama has proposed is a 10-year tax of 0.15 percent levied on the liabilities of the 50 largest banking concerns in the country, meant to raise $90 billion. The financial bailout cost the federal government hundreds of billions of dollars, and Obama believes the banks, now seemingly healthy and staggeringly profitable, should pay some back.

Those in the banking industry immediately reacted negatively, and in many cases disingenuously, to the concept.

"This is a punitive tax on companies that repaid TARP (the Troubled Asset Relief Program) in full or never took TARP," said Scott Talbot, the chief lobbyist for the Financial Services Roundtable, a group representing the largest Wall Street institutions.

That argument clearly and purposely misses the point. TARP, which doled out $247 billion to banks and has recouped $173 billion, is not the issue.

The crux of the matter is the (currently) $182 billion bailout of AIG, because that's where many of these companies are getting the money to pay such large bonuses.

In the simplest possible terms, AIG, the world's largest insurance company, sold the big banks policies on complex financial products, including the mortgage-backed securities that went bad when the housing market collapsed.

When the big banks came to collect on those policies, it became clear AIG couldn't afford to pay off, that if nothing were done, they would go out of business, and that many of the banks counting on their insurance payoff might also go bust.

Had AIG been allowed to founder, the big banks would have received pennies on the dollar. When the government stepped in, analysts thought Goldman Sachs and all the rest might get 50-60 cents on the dollar, just enough to keep them afloat.

But the big banks got paid off at 100 percent of face value, even though the policies were held by a bankrupt company and even though the banks themselves had designed and packaged the worthless securities on which they made the claims.

It is estimated Goldman Sachs alone got $13 billion in the deal.

So much of the bonus money is coming straight from the taxpayers, via AIG, and it's wrong.

Asked about the proposed tax, JP Morgan head Jamie Dimon said, "Using tax policy to punish people is a bad idea. All businesses tend to pass on the costs to consumers."

This time, the tax needs to be passed and the costs need to come out of the executive bonus pool or the profits, because the consumers and the taxpayers have already paid more than their share.


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