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Fin Reg was reopened to remove problem bank fees (taxes)

June 29, 2010

Ongoing blogging throughout this crucial day for Fin Reg.

$19 BILLION OF NEW CHARGES — some call them taxes, but it's titled a “Financial Crisis Special Assessments” — were slipped into the financial regulation reform bill late Thursday night/early Friday morning. These charges would apply to large financial institutions and hedge funds with over $10 billion in assets under management. Adding this in at the last minute is unfair; this large fee/tax should have been discussed earlier with more transparency.

Monday morning news.
Per The Hill, "Brown would vote 'no' on Wall St. bill; blames $19B in new bank fees", Sen. Scott Brown (R-Mass.) formally announced his no vote due to this very issue. Sen. Olympia Snowe (R-Maine) also took objection to the last-minute huge bank fee increases.

Tax increases were also added-on to the so-called "tax extenders bill," including taxes on the investment community (carried interest) and the S-corp SE tax structure for small-business professionals all around the country. Those tax increases changed the balance of voting and led to the bill's failure in cloture in the Senate.

It seems the Democratic leadership will slip in new taxes and fees on banks, hedge funds and the investment community at any juncture, in any related bill that comes up. President Obama's $90 billion "bank responsibility fee" (i.e., tax) is up next.

Earlier versions of the reform bill had a $50 billion bailout fund for winding down banks, but Republicans objected and that contentious issue was later dropped. Presto, it reappeared as a $19 billion re-branded bank/hedge fund fee at the last hour of conference. Is that playing fair?

During the last day of conference, a popular media clip showed Chairman Barney Frank (D-Mass.) telling a Republican Senator not to worry about going to the bathroom during the day, because he would not propose a change the Republican would object to during his bathroom break. I guess that promise did not include sleeping at night.

Some pundits are correct. Tax and fee increases on banks and the investment community will ultimately fall on the middle class, because businesses will try to pass on those added tax costs to their customers. Banks will also pay taxes and fees from capital and from assets that could otherwise be used for lending to businesses and consumers.

Monday afternoon news.
CNBC reported the conference may be reopened today to accommodate changes for winning back Brown’s vote. The CNBC reporter said conferees might drop the bank tax/fee and replace it with funds left over from TARP, and to end TARP earlier than scheduled.

WSJ, Democrats to Tackle Bank Fee to Win Votes. "One idea under consideration would be to have any new fees go toward bolstering the fund used by the Federal Deposit Insurance Corp. that deals with failed banks. Another idea under consideration is to claim unused cash sitting in the Troubled Asset Relief Program."

"I believe if you take out the new bank tax, on balance, it would improve our financial system, and I would support it," said Sen. Susan Collins (R., Maine.).

Does the TARP redeployment idea make sense? On the one hand, TARP was used to bailout banks and Fin Reg is related to this bank recovery/reform too. But on the other hand, banks are charged with paying back TARP, so they will have to pay back this $19 billion anyway. Asking banks and hedge funds for the tax or fee upfront in Fin Reg or financing it from TARP first and then making the banks and hedge funds pay it back sooner rather than later seems like an accounting-type gimmick.

If Brown is against banks having to pay $19 billion of new taxes or fees, then this type of accounting-gimmick does not hold muster. However, is he considering this change to honor his word in the conference and his prior yes vote on Fin Reg? Is he concerned about being perceived as a flip-flopper? I would rather he not flip-flop on voting for tax and fee increases.

The FDIC levy idea reported on so far seems far-fetched too. It would represent a huge increase in the FDIC-levy rate and it's still a huge cost to the banks, no matter what it’s labeled. Would hedge funds at least be exempt from the FDIC approach?

This reminds me of the other major problem I have with this Fin Reg bill. As I blogged on June 27, the resolution authority’s “wind down” procedure forces winning banks to pay for losing banks after wind down. That may cost banks and hedge funds much more than $19 billion.

Bottom line, Congress shouldn't burden banks with $19 billion at this delicate economic time, no matter what you call those charges.

Developing Story:
Reuters: "Senate Dems propose to cut total of TARP authority from $700 bln to $475 bln: Senate proposal" Sounds interesting. I will blog on this when I see the reporting later tonight.

CNBC Lawmakers Agree to Remove Taxes in Financial Reform Bill. "..lawmakers will likely end the $700 billion TARP program early and use some of that money to help pay for the measure ... The conferees will propose ending the Treasury Department's authority to require banks to accept additional TARP funds. While this authority would sunset over time rather than end immediately, budget rules say that this would result in a savings of something like $10 billion to $11 billion. Additional FDIC premiums also are being considered to bring in $3.5 billion, bringing the total closer to the $19 billion the lawmakers sought to raise with the bank tax. The Republicans are expected to accept this deal. The biggest banks would be subject to the higher FDIC fees, but not hedge funds, since they are not part of the FDIC system. On the other hand, smaller banks — exempted from the fee under the current bill — that operate under the FDIC system would likely find themselves footing the bill."

It's not clear to me where that $10 to $11 billion of TARP savings will come from. TARP was not paid for, it was authorized new-debt financing, so reducing unused program size doesn’t save anything, except the prospect of issuing more debt.

Wow, our government is going out of its way to do sugar-bowl, Enron-type accounting.

It sounds like the FDIC levy part will truly cost banks more money, but the TARP savings is just a mirage to help justify this Fin Reg bill as being true to “pay go” rules.

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