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Tony Fratto: Banks Trapped in Obama's Hotel California

President Barack Obama
Photo by: Pete Souza
President Barack Obama

U.S. banks are ensnared in a trap resembling the Hotel California — they can check-out any time they like, but they can never leave.

At the end of the dark desert highway, these are the house rules: banks should now pay more in taxes; increase their capital; reduce leverage; and — by all means — lend, lend, lend.

The latest stab of the steely knives came today with President Obama's plan to slap financial institutions with a tax intended to "recoup" losses from TARP, the financial rescue effort.

Banks, it should be noted have already paid back their TARP funds — ahead of schedule, and at a substantial profit to taxpayers. As Treasury Secretary Geithner asserted to Congress, taxpayers will earn "a positive return" from the government's investment in banks.

But that's not relevant here — the Treasury watchman is only programmed to receive. Bankers heads must have been spinning today when White House senior advisor Valerie Jarrett admonished them to stand down and meet their "obligations".

Today's announcement follows a year-long, populist, vengeance-inspired campaign of threats and insults by the Obama Administration aimed at bankers and banking.

The announcement is also marked by its duplicity: the Administration started to design the bank tax August, at the same time it was negotiating TARP early exit agreements with major banks. Presumably banks would have negotiated different deals for the government's warrants had they known a punitive tax was imminent.

Everyone agrees that taxpayer investments in the financial rescue should be repaid over time. And according to all reporting by the Treasury Department, taxpayers are being repaid — at least from banks. Those not repaying Treasury are non-banks — like the General Motors.

(White House sources claimed they were unable to come up with a formula for autos to pay back the taxpayer. I have a few ideas, but how about, "When you get the cash, send us a check"?.

According to the statute creating TARP, the President was not required to come forward with a plan to make up for losses in the TARP program until 2013. Why he raced forward with a new tax for possible losses had nothing to do with filling the TARP hole. It had to do with filling an urgent fiscal hole created to pay for new stimulus spending by the Administration and congressional Democrats.

And so, now Peter Orszag, the budget director, can scribble in $90 billion in his 10-year budget window, offsetting the coming new "stimulus" spending. ("And in the master's chambers, They gathered for the feast.")

Meanwhile, I'm sure the White House is marking a springtime date on the President's calendar for another ritualistic bank CEO bloodletting session.

And when the CEOs show up, the White House will greet them: Welcome to the Hotel California.

Such a lovely place.

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Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.