TARP Payback: Act II

As we closed out calendar year ‘09, our largest financial institutions were able to end a very difficult chapter of the Great Recession by paying back their TARP funds. These funds were paid back with interest and the federal government realizing an additional return through warrant coverage. This signified that our financial system was on the road to recovery. At the time, it was pointed out by the press that this freed these institutions from government oversight of their compensation plans, just in time for bonus season. Once again, Goldman Sachs (GS) was singled out along with JPMorgan Chase (JPM) and several others for the size of their bonus pool.

On Thursday of this past week, President Obama and his financial team took aim again at our 50 largest financial institutions, those with more than $50B in assets, by proposing a new Bank Tax. [This tax would exclude the Tier 1 Capital of these 50 large financial institutions. (NY Times 1/14/10)] The President outlined a plan to recover $90B over the next 10 years to cover TARP funds that would not be able to be paid back by Chrysler, General Motors, AIG, Fannie Mae and Freddie Mac. President Obama has called this new tax “a financial crisis responsibility fee.” (NY Times 1/14/10) He also said that his determination was tied to “massive profits and obscene bonuses” as well as “to their reckless risk taking” that lead to the financial crisis from which we are slowly recovering. This new tax will be presented to Congress along with the budget in February and would go into effect after June 30. It would need to be voted on and passed by both the Senate and the House.

I sense that this populist appeal will play well with both main street Democrats and Tea Party Republicans, but it will not strengthen our financial institutions during a recovery cycle and will probably result in curtailed lending and could end up being passed on to companies and consumers. If both parties were really interested in avoiding a replay of the risk taking that lead to the meltdown of the global financial system, they would be trying to find ways to strengthen the capital base of these institutions and avoid the amount of leverage that resulted in the risk taking in the first place. I believe that the leaders of our largest financial institutions would react positively to a call to strengthen their capital base, as opposed to being singled out again for blame and to pay for the government’s decision to bail out the automotive industry.