Bank Shot

Yes, the bank tax is unfair. But so was the bailout.

President Barack Obama

When defending the Wall Street bailouts, President Obama typically asked Americans to tolerate a certain amount of unfairness. Now, in proposing a tax on the largest financial institutions, he’s asking bankers to do the same.

The bank tax—or, if that’s too easy to say, the Financial Crisis Responsibility Fee—would impose a 0.15 percent tax on financial institutions with more than $50 billion in assets (excluding capital reserves and deposits). The tax would fall on about 50 firms and would reap an estimated $90 billion to $117 billion over 10 years—roughly the amount of TARP money that hasn’t yet been recouped.

So it’s efficient. But is it fair? In a word: no. Almost all the banks targeted by the tax have paid back the money they owed. Some of them paid back even more. Goldman Sachs, for example, repaid its money with a 23 percent return to taxpayers. Indeed, the part of TARP that went to banks is not the part that has lost money. That would be the billions in loans to the auto industry, AIG, and smaller banks across the country, as well as to mortgage foreclosure mitigation efforts. The big banks, by contrast, have been responsible debtors. (After the crisis started, that is.) Why target them?

For starters, because they helped cause the crisis in the first place—an original sin that somewhat devalues the collective cry of Wall Street. Second, because the bailout is a lot more than just TARP. If the bailout consisted of merely the $700 billion lent to financial institutions, the banks might have a stronger case. But the bailout was more than that: It was the FDIC guaranteeing bank debt. It was the government rescue of money-market funds. It was the Federal Reserve restarting the securitization market. It was the backstop of the commercial paper program. Taxpayers assumed a huge amount of risk through these programs, and the banks profited. Third, because this is how TARP was supposed to work: The legislation that created it, the Emergency Economic Stabilization Act, stipulates that the financial industry has to pay back all the money it owes. It just didn’t specify how.

And that’s where the unfairness comes in. Nowhere does the legislation say that the 50 biggest firms have to pay back the loans. That responsibility could have fallen to any number of financial institutions. It was the Obama administration’s idea to focus on the big guys—a decision that’s hard to explain entirely in nonpolitical terms.

Sure, there is a policy explanation. Taxing the biggest banks discourages them from becoming “too big to fail.” How much it discourages them is up for debate. Is a 0.15 percent tax going to dissuade two $25 billion investment firms from merging? Who knows. Another benefit: taxing nondepository assets encourages large banks to do more traditional lending—i.e., lending that is actually based on the amount of insured deposits they have—which they’ve been hesitant to do after getting bailed out. But that doesn’t explain why smaller institutions aren’t at least asked to help.

What explains that decision is politics. “People tend to think of smaller banks like Jimmy Stewart in It’s a Wonderful Life,” says Doug Elliot, a former investment banker at JPMorgan who now works at the Brookings Institution. “They have a much better political standing.” They’re also in every congressional district, as opposed to the big banks, which are headquartered mainly in New York.

Bankers also say that any tax on them will get passed onto the consumer. But that doesn’t really bother supporters of the tax. “If Bank of America wants to pass its cost on to consumers, that’s fine,” says David Min of the Center for American Progress. “I’ll just go over to my regional bank.” Another objection from the financial industry is that the tax will reduce the amount they can lend. Again, says Min, no worries. If banks do lend less, they will be less likely to become “too big to fail.” Plus, they can always start doing less securitization and more depository lending, which is considered safer and isn’t affected by the tax.

Going after the big banks and leaving the little guys alone may be a crass populist move. Obama’s poll numbers are lower than they’ve ever been. Anger over the executive bonuses still rages. And banking executives are defending their practices before Congress this week with no signs of penitence.

But it’s also a course correction. Last time, big banks profited from their own failures on the backs of taxpayers. This time, taxpayers will recoup the money they lost on the backs of the big banks. Two wrongs don’t make a right. But they do make it even.