Alexandra Frean, US Business Correspondent
January 14, 2010
The 50 biggest banks and financial institutions in the United States, including as many as 15 foreign-owned companies, will face a new levy on their assets for at least ten years to help to recover an estimated $90 billion (£55.3 billion) of taxpayer money used to bail out banks and other corporations at the height of the financial crisis.
The new “financial crisis responsibility fee” is scheduled to be announced today by President Obama, in a move designed to quell popular anger at the bailouts received by banks, which many blame for causing the crisis.
It will be levied on banks and financial institutions based on their size, regardless of whether they received bailout money.
A senior administration official said that the fee was designed to “put the largest burden on those of the largest size, who took on the most excessive risk” that led to a near-collapse of Wall Street in 2008.
It also aims to ensure that the costs of the bailout are not added to the deficit or passed on to future generations.
The White House suggested that banks should dip into the money set aside for their “excessive and often outlandish” executive bonuses to cover the cost of the levy.
“It is the least they could do,” an official said, adding that bailout money had been given to the banks not to help them individually, but to help society as a whole.
An official said that the levy, which will become payable on June 30, would apply only to firms with more than $50 billion in assets.
No small banks or community banks will be subject to it, he said.
Covered institutions would include bank holding companies, thrift holding companies, insured depositories and broker dealers as well as insurance companies that own these types of entities.
“The fee that would be assessed would be approximately 15 basis points of covered liabilities,” the official said.
“This would be determined by looking at a firm’s total assets and subtracting their Tier 1 capital, which includes their common stock, disclosed reserves and retained earnings.”
He added that liabilities that were already being assessed by the Federal Deposit Insurance Corporation would also be excluded, as would the insurance policy reserves of insurance companies .
Full details will be published in February, giving the Administration the opportunity to consult on all aspects of the proposals.
The ten biggest US banks and AIG, the insurance company, as well as some broker dealers, will be among the 35 or so US companies expected to be liable for the levy.
They will have to pay even if they have already paid back bailout money given to them.
It is thought that ten to 15 foreign-owned institutions will be covered.
Carmakers, such as General Motors and Chrysler, which together received $65 billion in funds under the Troubled Asset Relief Programme (Tarp) will not have to pay.
The White House justified the blanket levy on the financial sector by saying that all institutions in the sector benefited from the bailout, even if they did not take any funds from it.
“There is no major financial firm in the US that is not an extraordinary beneficiary of the extraordinary measures taken,” the official said.
“It’s beyond the pale for any of these major financial institutions to suggest that they were islands unto themselves untouched and not benefited by the extraordinary policies that were taken under the Obama Administration.”
He defended the decision not to make the carmakers subject to the levy, arguing that the structure of the automotive industry’s assets would make it impracticable.
“The structure of providing fees on liabilities is one on which there is significant experience of in the financial industry,” the official said.
“It is very hard to apply that traditional financial industry structure to something like an auto company.”
The new levy will last for a minimum of ten years or as long as it takes to ensure that “every penny” of Tarp funds is repaid.
Administration officials calculate that the levy will raise about $90 billion in its first ten years, which should be sufficient to cover the present estimates of Tarp losses of $117 billion, itself a significant reduction from previous estimates of $341 million.
The White House warned that it would be highly irresponsible for banks to pass on the cost of the fee to their customers in the form of higher fees.
Given that the fee will not be levied on medium or smaller-sized banks, banks that raised fees would be placing themselves at a competitive disadvantage.
“It is in many ways offensive for those at our major financial institutions to suggest that they can afford excessive, often outlandish, bonuses for their top executives, but cannot afford to make whole the taxpayer who put forward public policies that they have benefited from in excessive measure,” the official said.
The regulations for recouping the bailout money were laid out in Section 134 of the Emergency Economic Stabilisation Act, signed into law in the autumn of 2008 by the Bush Administration.
This stated that by 2013 “the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt”.
A senior official of the Obama Administration said that the President saw no reason to wait until 2013 to act.
“We felt it was right to start this as soon as possible, both so that the public understands the seriousness of the President’s commitment to make sure they are paid back and because the sooner you start the less impact there will be on the short and medium term on the deficit,” the official said.
Mr Obama will announce details of the levy today before the start of the bank reporting season, which begins tomorrow with JP Morgan.
Tensions are running particularly high because Wall Street banks are about to announce bonuses for 2009, which are expected to run into average payouts of hundreds of thousands of dollars, with star employees receiving millions.
Did you like what you read here? If so, please be kind enough to donate to support the cause (click HERE). It takes time and money to create a website like this and I love doing it so anything would be very much appreciated. And I’ll personally email you a free thank-you gift in return – my 214 page ebook about debt, credit, bankruptcy, investing and much more!