Just ahead of the World Bank/IMF meetings in DC this week, the IMF has prepared a report that advocates everyone tax their banks to pay for future bailouts.
The IMF wants to tax balance sheets, profits, and compensation of financial firms to accomplish this task. “Expecting taxpayers to support the [financial] sector during bad times while allowing owners, managers and/or creditors of financial institutions to enjoy the gains of good times misallocates resources and undermines long-term growth," according to the paper.
The IMF wants to raise 2-4% of GDP or about $1 trillion and then create another tax on activities that would be distributed to a nation’s treasury to help finance the broader costs of a financial crisis.
Take a moment to let that sink in, an international institution taxing your country’s banks to allow it to pick winners and losers in the financial sector to bail out. The first word that comes to mind is Greece. Pretty disturbing, right? Now, we begin to understand how German taxpayers must feel during the negotiations that are currently occurring in Europe and with the IMF.
How would a voter in Alabama or Ohio or California feel about a US financial firm being taxed and then in turn passing that tax on to consumers and then having that money go outside the country to a place decided by the IMF?
And the bailout fund is part of what is still at issue with financial regulatory reform in the United States. While the Treasury has indicated that they don’t even want the proposed $50 billion fund included in the Dodd bill, there are still about four other areas within the bill that provides bailout authority and encourage bad behavior by financial institutions.
Wouldn’t it be better to strengthen the bankruptcy provisions for financial firms to provide a clear path to wind down and get rid of the ability of the federal government to own/bailout firms? By doing this, it would eliminate the large financial institutions from receiving the implicit guarantee and implicit funding advantage that they have with this guarantee.
Today, the Senate Ag Committee meets to discuss another major aspect of contention with financial regulatory reform: derivatives. The key component is the OTC derivatives language that they hope to place into the Dodd bill if it passes committee. Last week, Chairwoman Sen. Blanche Lincoln surprised the markets by disclosing language that would mandate banks give up all activity in all swaps markets or lose their FDIC deposit guarantees.
Obviously, this would be a negative for banks and their earnings. (This occurred within 24 hours of the SEC charging Goldman Sachs with fraud and helped create tremendous uncertainty for the financial sector.) Not surprising, ranking minority member Sen. Saxby Chambliss and the other 8 Republicans on the committee are against it. The bill can get out of committee on a straight 12-9 partisan vote today.
In its current form, how likely will it make it into the Dodd bill? I would say less than 30%. However, this language is likely to be modified towards mandating OTC derivatives to be exchange traded or run through a clearing house along with higher capital requirements to trade these instruments. Remember with all this new regulation, the law of unintended consequences will be high especially for the arcane world of derivatives.
The Dodd bill is expected to reach the floor of the Senate next week and then the messy amendment process begins. Stay tuned.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.