Investors are whispering that Washington is gunning for Wall Street after the White House proposed a new bank tax.
Called a 'financial crisis responsibility fee' the move could generate as much as $90 to $120 billion dollars for tax payers over the next 10 years.
And these developments couldn’t come at a more precarious time. JPMorgan kicks off bank earnings on Friday in what’s expected to be a season of big profits and bigger bonuses.
That’s sparked outrage on Main Street, which largely believes many banks wouldn’t even be in business right now, if not for the tax payer financed TARP program.
The situation looks to be volatile and about to get worse. Fast Money spoke to pay Czar Ken Feinberg about these and other developments.
As you likely know, Feinberg was appointed in June amid taxpayer outrage that firms getting federal funds were paying top executives exorbitant salaries. In the past 6 month he has worked to curb compensation while still meeting company demands for competitive salaries to attract and keep talent.
Here’s a synopsis of what he told us:
Fast Money: Is the new Obama tax fairly structured?
Feinberg: I can’t speak to the tax --it's not part of my jurisdiction -- but I would say one of the issues posed is that despite my performance based criteria that governs compensation, it’s limited to just a very few companies. And it doesn’t deal, completely, with the overall size of these bonuses so I can see how the tax would fit as part of an overall recipe for reform. But it’s not on my watch.
Fast Money: What should be the metric for compensation?
Feinberg: The metric that I use -- that's been adopted not only by the TARP recipients but by a good part of Wall Street -- is the metric that ties compensation to long-term performance in stock, so that the days of guaranteed cash are over. And they're replaced with the notion that compensation and bonus is ultimately going to take the form of stock. And stock that’s not redeemable for 2, 3, 4 or 5 years. So you’re going to have to sit on that stock. And as the value of that stock goes up based on the performance of the company - that's how compensation will be determined.
Fast Money: But if I can put on a trade, and in one month I’ve made a few hundred million dollars, why should I have to wait 3 or 4 years, if I’ve made my year?
Feinberg: Because it’s that kind of excessive risk that’s determined by short term swings in company performance that led us to conclude that in the overall economy of the country it’s better that you would have to wait for long-term market forces rather than short-term swings in the market.
Check out our entire interview with pay czar Ken Feinberg. Watch the video above.
Our news partner, Reuters, provided a detailed look at the plan. It follows on the next page:
WHO IS GOING TO HAVE TO PAY THE FEES?
The intent is to apply the fee to the largest and most highly leveraged firms like bank and thrift holding companies, insured depositories and insurance companies, charging a fee on debts of firms with assets of $50 billion or more to try to deter them from excessive use of leverage.
The fee will apply not only to firms that got bailout money but also to others that did not, if they are big enough.
Broker-dealers with assets of $50 billion or more would also be charged the fee.
The White House estimates that over 60 percent of the fees will be paid by the 10 largest financial institutions.
Small community banks, which generally do not meet the $50-billion-dollar assets threshold, would not pay the fee.
Administration officials estimate that about 50 firms will have to pay it, around 35 U.S.-owned and the remainder of them U.S. subsidiaries of foreign-owned financial firms.
HOW MUCH IS THE FEE?
It will be set at about 15 basis points, or 0.15 percentage point, of covered liabilities. That will be determined by looking at total assets and subtracting tier one capital including common stock, disclosed reserves and retained earnings as well as Federal Deposit Insurance Corp-insured deposits at banks and policy reserves at insurance companies.
DOES THE PLAN INCLUDE SPECIAL CASES?
In the context of the bailouts, during which some firms got special help that spotlighted their distress, a few are being spared the fee despite the fact that there is anger at them.
U.S. automakers General Motors and Chrysler, which both went into bankruptcy during 2008 and got bailout money, will not have to pay because they are industrial companies and it is hard to measure their liabilities on the same basis as a bank.
Mortgage giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N), famed for paying their executives handsomely in the high-flying 1990s but driven into government conservatorship in 2008, will not be charged the fee because they now are essentially taxpayer-owned entities.
WILL THIS FEE LAST FOREVER, OR IS IT TEMPORARY?
The administration wants to keep it in place for 10 years, or as long as necessary to recover all TARP losses. President Barack Obama says he wants to ensure that "every single dime the American people are owed" comes back.
Over 10 years, the administration expects to raise $90 billion and officials think that will cover eventual costs of the bailout program.
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Trader disclosure: On January 14th, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Pete Najarian Owns (AMAT) Calls; Pete Najarian Owns (CLF), Is Short (CLF) Calls; Pete Najarian Owns (HUM) Call Spread; Pete Najarian Owns (INTC) Call Spread; Pete Najarian Owns (MS); Pete Najarian Owns (PFE); Pete Najarian Owns (QCOM) Calls; Pete Najarian Owns (TCK), Is Short (TCK) Calls; Pete Najarian Owns (TXT) Call Spread; Pete Najarian Owns (XLF) Calls; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Finerman's Firm Is Short (IYR), (MDY), (IWM), (USO), (UNG), (TLT), (BCR); Finerman Owns (AAPL); Finerman's Firm And Finerman Own (CVS); Finerman's Firm Owns (MSFT), (TGT), (WMT); Finerman's Firm And Finerman Own (WFC) Preferred; Finerman Owns (BAC) Preferred, (BAC); Finerman's Firm Owns (BAC), (BAC) Leaps; Finerman's Firm And Finerman Own (GOOG); Terranova Is Long March British Pound Futures; Terranova is Long Copper Backwardation Futures: Long May 2010, Short July 2010; Terranova Owns (QCOM), (MSFT), (EMC), (FCX), (JPM), (FTO), (XOM), (BAC); Terranova Is Short (CMA), (JCI), (CAL), (ESS), (AGU), (ICE); Terranova Owns (POT) Feb. Puts; Terranova Owns (XHB) March Puts
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