With an emphatic and populist tone, President Barack Obama on Thursday described bank bonuses as "obscene" and called for a new tax on Wall Street's largest firms to cover a projected $117 billion shortfall in the government's financial crisis bailout fund.
In remarks prepared for a White House appearance, Obama said he was determined that every dollar spent from the $700 billion Troubled Asset Relief Program to rescue Wall Street firms, auto companies and mortgage holders is either repaid or paid for in some fashion. Congress would have to approve the tax.
"My determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people who have not been made whole, and who continue to face real hardship in this recession," Obama said in his prepared remarks.
In proposing the tax, Obama and his advisers are capitalizing on public antipathy toward banks blamed for causing the crisis, while at the same time addressing a desire to show progress toward reducing record federal deficits.
The president is proposing a levy of 15 basis points, or 0.15 percent, on the liabilities of large financial institutions. The tax, which officials are calling a "financial crisis responsibility fee," would apply only to financial companies with assets of more than $50 billion. Those firms — estimated to amount to about 50 institutions — would have to pay the fee even though many did not accept any taxpayer assistance and most others already paid back the government lent to them.
The administration expects that 60 percent of the revenue would come from the 10 largest firms. As proposed, the fee would go into effect June 30, 2010, and last at least 10 years.
Obama advisers believe the administration can make an argument that banks should tap their generous executive bonus pools for the fee instead of passing the cost on to consumers.
At issue is the net cost of TARP, the fund initiated by the Bush administration to help financial institutions get rid of toxic assets. The fund has since evolved, helping not only the banking sector, but also autos and homeowners.
Insurance conglomerate American International Group, the largest beneficiary with nearly $70 billion in bailouts, would have to pay the tax. But General Motors Co. and Chrysler Group LLC, whose $66 billion in government loans are not expected to be fully repaid, would not be subject to a tax.
Bankers did not hide their objections.
"Politics have overtaken the economics," said Scott Talbott, the chief lobbyist for the Financial Services Roundtable, a group representing large Wall Street institutions. "This is a punitive tax on companies that repaid TARP in full or never took TARP."
Jamie Dimon, chief executive of JPMorgan Chase & Co., speaking to reporters Wednesday before details of the tax were known, said: "Using tax policy to punish people is a bad idea."
"It would be very hard for the industry to pay for the auto companies," Dimon added. "I mean, at one point you have to be a little fair."
The administration official said Obama wanted to accelerate a requirement in the existing TARP law that requires the president to seek a way to recoup unrecovered money in 2013, five years after the law was enacted.
The administration is also rejecting Dimon's argument that banks should not pay for shortfalls from the auto industry. The official said the thinking is that major financial institutions were both a significant cause of the crisis and major beneficiaries of the government's rescue efforts and should thus bear the brunt of the cost.
For banks, the tax would not affect their biggest liability — insured deposits, which already are assessed by the Federal Deposit Insurance Corp.
The bank levy would generate an estimated $90 billion over 10 years. It could remain in place longer, however, if needed to eliminate the shortfall. The official said that if the shortfall was eliminated within a decade, the tax would still remain in place for the full 10-year minimum.
Banks have been paying back their infusions. Any shortfall would probably come from money used to prop up AIG, to support GM and Chrysler through bankruptcy protection and to assist homeowners with their mortgages.
So far, the Treasury has given $247 billion to more than 700 banks. Of that, $162 billion has been repaid and banks have paid an additional $11 billion in interest and dividends.
In Congress, the idea was receiving a predictable partisan reaction, with Democrats embracing it and Republicans rejecting it.
"Look, the financial institutions collectively, particularly the larger ones, caused problems by their errors — their errors of judgment, their irresponsibility, in some cases their skating around dishonesty," said House Financial Services Committee Chairman Barney Frank, D-Mass.
"I think it is entirely reasonable to say that the industry that, A, caused these problems more than any other and, B, benefited from the activity, should be contributing," he said.
Republican Rep. Jeb Hensarling of Texas, a member of Frank's committee, ridiculed the idea. "To think that banks will loan more money if you tax them is beyond economic ignorance," he said.
On the Net:
Federal Deposit Insurance Corp: http://www.fdic.gov/
Financial Services Roundtable: http://www.fsround.org/
Troubled Asset Relief Program: http://www.financialstability.gov/
House Financial Services Committee: http://financialservices.house.gov/
Financial Crisis Inquiry Commission: http://www.fcic.gov
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