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.

Was Flipping the Bird to the Treasury a Good Idea for U.K. Banks?

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Referencing of course the ongoing drama involving the City and the British government, RE: a 50% bonus tax. This had the intention of reducing oversized banker bonuses, but recently it has been noted that most banks will simply take the hit of the 50% tax and pay their employees anyways. Evidently, some banks chose to go heavier on deferred stock bonuses, which only incur the much lower capital gains taxes rather than the lofty 50%.

For the budget deficit ridden U.K., which estimates the tax may generate as much as 2 billion pounds, this provides quite a nice little windfall for them. Obviously it's not accomplishing what they hoped it would, but for taxpayers incensed by high flying bonuses for companies they feel they saved from the brink of destruction, it's a decent consolation.

This is of course what the banks have chosen as the short-term fix to what might prove to be a long term problem. As it were, the banks don't have the option to move over night as they please (for the lack of flexibility in office space leases for one thing), so they really could only answer the question "to pay or not to pay".

In terms of extending the time frame out a little farther, banks have much more freedom in terms of choosing where to do business. As I look at it, since they went ahead and took the hit of the bonuses, the tax is going to stay in place as long as people are willing to pay it. So as a bank, you either have to do one of two things: move your office, or hope that enough other people move their offices such that the government drops the tax to retain jobs.

Could it have been different? I'm of the opinion that was the City to have laid low for a little while until the public outcry died out, potentially the tax might have been dropped. But as it were, I don't think there's any incentive to drop the tax since government officials likely figure that they have a captive market, willing to pay the necessary amount as a cost of doing business.

That being said of course, human capital is much more mobile than businesses. So perhaps paying the taxes was the only option they really had to retain top performers.