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Change In Financial Bill Makes Bank Tax More Likely

The Senate’s decision to drop a prepaid, $50-billion resolution fund from its package of financial reforms increases the chance that the Obama administration can push through a controversial $90-billion bank tax.

The administration never really supported the idea of having banks make advance payments into a fund to help cover the costs of potential bank bailouts, say sources, and overcoming business opposition to both the fund and the tax was considered almost impossible. (

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Banking Committee Chairman Chris Dodd (D-Conn.) was neutral at best.)

The Senate decision is important because it means a $150-billion version of the fund in the House’s version of the reform bill will not survive.

“Once it is gone from the Senate bill, it’s gone altogether,” says one senior Congressional staffer. “It’s two against one,“ meaning the Senate the White House vs. the House.

Instead, the reform legislation will ask banks to essentially set aside reserves in a tax-friendly manner to cover costs at a later date, if necessary.

The administration’s preference for a bank tax was also underscored by the recent Congressional testimony of Treasury Secretary Timothy Geithner when he described the “virtues” of a special $90-billion tax, which the administration has chosen to fulfill the legal mandate of having the government recover any losses suffered under the unpopular TARP.

“The virtue of this design is …you can think of it as a too-big-to-fail tax, a tax on leverage, a tax on risk but its purpose...is to meet the legal obligation under the law to cover...(the state's) losses," Geithner told the Senate Finance Committee Tuesday.

Observers say the tax has another virtue as well as none of the baggage of the fund.

“The tax is a political gimmick,” says former FDIC Chairman Bill Isaac. “They can tell the taxpayers, ‘We’re going to sock it to those bad banks.’ The bailout fund doesn’t get you any political points “People think, ‘Aren’t you the guys who just said you didn’t want to bail out anyone anymore? ‘”

Skeptics also point to the fact that the administration in portraying the tax as a way of fulfilling a requirement under the TARP program, happens to be doing so some three years before the law requires the President to offer a proposal to recoup any lost funds—now estimated by the Treasury to be about $117 billion.

What’s more, though the bank tax may be near the top of the administration’s wish list, it’s far from a finished product.

It is intended to apply to financial firms with assets of $50 billion or more that also received some find of financial aid because of the financial crisis, such as AIG , Citigroup and Bank of America, regardless of whether they have since repaid the money.

At various times, however, the administration, has said that it the 0.15-percent tax—which would exist for ten years--should apply to total assets or total liabilities.

There’s a big difference between the two, in as much as the former includes government insured commercial bank deposits such as savings accounts, while the latter includes non-insured deposit funding, such as such as money borrowed from a money market.

“Is this simply to recoup TARP losses or to punish people and change behavior,” asks Mark Calabria of the Cato Institute.

And while the administration has compared the new tax to the sliding fee the FDIC charges for banks that take consumer deposits, it is clear the tax is meant to address risk and leverage.

“It essentially considers all bank liabilities as deposits,” says Alex Pollock, a resident fellow of the American Enterprise Institute, who served as CEO of the Federal Home Loan Bank of Chicago for more than a decade.

Sources say it's possible, if not probable, that the tax is added to the reform package, after the Senate follows the house in approving a bill.

In as much as all tax measures must originate in the House of Representatives, jamming it into the reform package at this point would require some commiseration between the two houses of Congress.

The House is expected to go along with any Senate version as long as it can offer a few modifications. Under such a scenario, the tax would be among those changes, assuming there is support in both houses.

Others say including the tax in the massive reform bill would dilute its PR impact and rob Democrats of an opportunity to play budget politics.

Under current law, revenue from any new tax measure must be used to pay for extraordinary spending initiatives and the Obama administration is under pressure to address a ballooning budget deficit.

“There's too much political mileage to be had in using it as an offset,” says one Washington insider.

Though the administration says the tax is meant to recoup TARP costs, Geithner would not commit to that exclusive use during his recent Senate panel appearance

Given those circumstances, the tax could be applied to any number of Main Street benefits, such as continuing jobless benefits or foreclosure mitigation efforts.

Nevertheless, there are risks as well as rewards to that approach. Any tax bill would be subject to amendments and thus potentially vulnerable to diffusion or even dilution, even if, as sources say, it would be hard to vote against the core measure.

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