15 January 2010


The administration is proposing a tax on banks to cover presumed losses in the TARP program. The trouble is that none of these losses have come from the banks, who by and large have or are paying back their TARP money as quickly as they can. The government has made a healthy profit on these loans. Losses have been incurred on the part of GM, Chrysler, Fannie Mae and Freddie Mac (the latter two government entities). Guess who won’t be taxed under this proposal. GM, Chrysler, Fannie Mae and Freddie Mac. So the government is penalizing banks for other losses, while so far there have been no losses on banks; only profits. The successful are being penalized for the profligate and hopeless. Meanwhile the public has been convinced that the banks are the beneficiaries of government largess, when the opposite is true.

Some banks, like JPMorgan Chase did not want or need TARP funds, but were forced to take them by the government. They ran their companies prudently and were never in trouble. That is also true of Goldman Sachs, but they sold derivatives and then turned around and sold them short. If Goldman were taxed that would be fine, since they play and contribute to all sides, but there’s no way to do that. What we should do is at least resolve that no Treasury Secretary ever come from Goldman Sachs again.

The proposed tax would be based on the level of risk exposure a bank has, which is not a bad idea, except that such things are usually passed on to customers. What is really needed is a review of capital requirements. We don’t need to bring back the depression era Glass-Steagall banking act (which separated investment and commercial banking). However some of its spirit could be revived. There should be separate requirements for the capitalization of the commercial banking sector. These should be stringent enough to cover depositors funds safely. The capitalization requirements for investment banking could be different. The banks capital would not be combined but treated separately. That way if officials are dumb enough to speculate excessively through the investment bank it would not affect the commercial bank, which would remain solvent. Then the losses, if any would accrue to the stockholders, not the public. At the same time, as far as bonuses and compensation go, these are matters for the stockholders to decide, not the government. Some trading bonuses are overly lucrative, given that they share in the profits but not the losses, and this is money that would otherwise go to the stockholders through dividends or reinvestment in the firm. There is certainly an imbalance in what traders earn versus the rest of the firm in many cases, but despite public “outrage,” decisions on this matter properly reside with the people who are actually paying for it. For contrary to the impression left by the media, the public is not paying for any of this.

The real losers are the aforementioned General Motors et al. After stealing the stockholders and bondholders property and giving it to the UAW, the administration now proposes to further subsidize them at the expense of the banks. As with the “stimulus,” which has mainly benefited public employee unions through government expansion this government is clearly beholden to the unions on an unprecedented scale.

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