Yesterday, President Obama put forth a proposal to recover a projected shortfall in TARP repayments. When the TARP was created, the EESA statute specified that the president would need a plan before 2013 to avoid shortfalls that would add to the deficit. Instead of 2013, we got one this week. Is it a good plan? Here’s what you need to know:
All huge banks are affected, no small banks are
Working on the assumption that the nation’s biggest banks either directly or indirectly benefited from the rescue program (or “bailout”), the new fee will be applied to “the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms”. That’s extra-syllable speak for “try to prevent banks from making the greedy risky bets that created this mess.”
The fee will not apply to small or community banks. (For more on why you might consider a community bank, take a look at the “Move Your Money” meme.)
It will not apply to FDIC deposits
In other words, the money that you put in the bank is irrelevant to this proposal.
The fee will be 15 basis points per year
If you’re unfamiliar with “basis points”, that just means 0.15%. So, here’s the formula for how much one of the enormous banks would be taxed:
Amount owed per year = 0.15% * assets held by the bank – Tier 1 capital – FDIC-assessed deposits
So if a bank has $1 trillion in assets, $100 billion in Tier 1 capital, $500 billion in FDIC deposits, then the amount subject to the tax is $400 billion, meaning the bank will owe $600 million per year.
Can this be improved?
From what I’ve seen of signs held by Tea Party protesters, Obama’s message of “we want our money back” should be quite appealing (even though as of yet, nobody’s taxes have been raised, but this proposal is intended to prevent a larger deficit). Given how long it’s taken to come to light, I’d like to think this proposal has been very carefully crafted.
Still, I’m not sure if I agree with the “indirectly benefited” part of the argument, assessing the fee on every ridiculously-big bank, regardless of whether they accepted TARP funds.
Removing time machines from the equation, do you have any tweaks to this proposal, or an entirely different idea for covering a projected shortfall? (Fair warning: if you say “cut back on government waste and spending”, I hope you can provide specific examples of things you want to cut, and an educated guess on how much it would save.)
The President to Wall Street: “We Want Our Money Back, and We’re Going to Get It”, from the WhiteHouse.gov blog
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Basics of the Financial Crisis Responsibility Fee (Bank Tax)
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