Thursday, January 14, 2010

I'll Take Obama's Bank Fee Plan Over the U.K. Banker Tax Any Day

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Yesterday I talked about the choices that faced U.K. banks following the 50% bonus tax levied on them. Today, in light of the news that Obama is going to levy a fee on U.S. banks of over $50 billion in size, I felt it well fitting to discuss this current development.

The fee, which is expected to raise "$90 billion over 10 years", is geared towards trying to pay back the money lost under the TARP bailout system. The apparatus for determining the fee per bank:

The fee would be approximately 15 basis points, or 0.15 of a percentage point, of covered liabilities, or total assets minus Tier 1 capital -- common stock, disclosed reserves, retained earnings -- and excluding FDIC-insured deposits for banks or insurance policy reserves for insurance companies, the official said. [Bloomberg]

In terms of the financial system, I am of the opinion that it will regularly experience shocks of confidence, since by it's nature most financial firms rely on the investor and counterparty's confidence that they will remain a going concern to earn a profit (the FDIC helps). Since I am of the opinion that crisises, especially in vulnerable sectors like financials, are an inevitability due to human nature (i.e. the ability to suspend rational thought once the "panic" button has been depressed), operating under the perspective that this will not be the last bailout of financial institutions is, I believe, a good idea.

I see the Obama plan as doing two positive things: recouping bailout funds from an industry that greatly benefited from its support and will likely need it in the future and providing incentives for firms to decrease in size. These large firms are the ones that pose a systemic threat were they to collapse, so I think means by which to gently encourage shrinkage would be a net positive for the system. Ignoring, of course, the obvious political rhetoric ("when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people" etc. etc.), which I see as mostly trying to rustle up voter approval in the face of mid-term elections, this plan to me is very solid.

This of course stands in juxtaposition to the U.K. bonus tax plan. One of the things that I found most distasteful about that plan was the perspective that all bonuses, no matter whether or not they were deserved, were evil. I think that's dangerous territory to step in to, because financial firms are not the only ones that pay bonuses. While one might make an argument that financial firms are in a league of their own because of the size of their bonuses, I still feel that it's a slippery slope to be walking on. I see the 50% tax as a populist measure at trying to strike down select human beings.

In contrast, I feel the Obama measure, while assuredly being unpopular at banks, will actually help discourage firms from reaching the TBTF stage. I think that recognizing the frailty of the financial system is paramount to learning from the mistakes of the credit crisis.

I know myself, a current student looking for employ in the financial sector, would be exposed to the operational risks of financials. That's why my retirement and savings plan would be of a much lower risk quotient than the average American to offset my increased employment risk.

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