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Basics of the Financial Crisis Responsibility Fee (Bank Tax)

This article was written by in Economy. 22 comments.


Yesterday, President Obama put forth a proposal to recover a projected shortfall in TARP repayments. When the TARP was created, the EESA statute specified that the president would need a plan before 2013 to avoid shortfalls that would add to the deficit. Instead of 2013, we got one this week. Is it a good plan? Here’s what you need to know:

All huge banks are affected, no small banks are

Working on the assumption that the nation’s biggest banks either directly or indirectly benefited from the rescue program (or “bailout”), the new fee will be applied to “the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms”. That’s extra-syllable speak for “try to prevent banks from making the greedy risky bets that created this mess.”

The fee will not apply to small or community banks. (For more on why you might consider a community bank, take a look at the “Move Your Money” meme.)

It will not apply to FDIC deposits

In other words, the money that you put in the bank is irrelevant to this proposal.

The fee will be 15 basis points per year

If you’re unfamiliar with “basis points”, that just means 0.15%. So, here’s the formula for how much one of the enormous banks would be taxed:

Amount owed per year = 0.15% * assets held by the bank – Tier 1 capital – FDIC-assessed deposits

So if a bank has $1 trillion in assets, $100 billion in Tier 1 capital, $500 billion in FDIC deposits, then the amount subject to the tax is $400 billion, meaning the bank will owe $600 million per year.

Can this be improved?

From what I’ve seen of signs held by Tea Party protesters, Obama’s message of “we want our money back” should be quite appealing (even though as of yet, nobody’s taxes have been raised, but this proposal is intended to prevent a larger deficit). Given how long it’s taken to come to light, I’d like to think this proposal has been very carefully crafted.

Still, I’m not sure if I agree with the “indirectly benefited” part of the argument, assessing the fee on every ridiculously-big bank, regardless of whether they accepted TARP funds.

Removing time machines from the equation, do you have any tweaks to this proposal, or an entirely different idea for covering a projected shortfall? (Fair warning: if you say “cut back on government waste and spending”, I hope you can provide specific examples of things you want to cut, and an educated guess on how much it would save.)

The President to Wall Street: “We Want Our Money Back, and We’re Going to Get It”, from the WhiteHouse.gov blog

Published or updated January 15, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Smithee formerly lived primarily on credit cards and the good will of his friends. He is a newbie to personal finance but quickly learning from his past mistakes. You can follow him on Twitter, where his user name is @SmitheeConsumer. View all articles by .

{ 11 comments… read them below or add one }

avatar Investor Junkie

My questions regarding the whole thing,

Why should a bank be punished if they didn’t ever accept TARP?

While it directly states it’s not about FDIC insured deposits, won’t it indirectly affect them? ie the banks will increase their fees and lower their rates to help pay for this?

Obama states “we want our money back”. Haven’t most paid back with interest?? The ones that we aren’t seeing money coming back from is AIG, and the auto companies.

This to me all sounds like window dressing.

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avatar Geoff

I don’t know what I think, but it is something. As for the fees being passed on to others, as I understand it, the hope is that the small banks’ fees will keep the large banks from implementing higher fees to pay this federal fee.

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avatar Tim

It’s also an extremely hard sell to tell your customers you can’t afford the fee (and therefore have to pass it on) when you’re handing out billions in bonus money.

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avatar Harm

I imagine the end result would be (at best) the big banks paying .15% less
interest on deposits and charging .15% more on all sorts of loans. Wait, EVERY
bank, because they can get away with it. Another salvo in the war on savers….
.15% less interest? I have a relatively small (now) mm account at BofA, that would
mean I’d be paying THEM to keep my money, rotfl.

ouch, it only hurts when I laugh

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avatar Link Stifle

And that’s why you invest in, at the minimum, a few hundred dollars of gold. Even after this recession when the dollar get’s it’s strength back (and believe me, it will), gold will still gain value faster then any bank Savings or CD account rate. If you really want security, buy gold jewelry and simply hide it somewhere secure. Dump Bank of America, go with a smaller community bank or credit union, although they lack the capital to keep their interest rates as high as BofA, they’ll likely be a better choice in the end. Also, if you account is “small” and under $250,000, it’s not like you need to worry about losing your deposit (unless you make the mistake of putting the money in a non-FDIC partner bank).

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avatar Pastor Jim Kibler

This 15% tax on the banks will be passed on to business people who borrow money. Banks usually lend $10 for every dollar then have on hand and this bill will take about one trillion dollars out of the economy. This is by design.

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avatar Link Stifle

Read closer, it’s 0.15%, less then a quarter of one percent. This bill also doesn’t take any money out of the economy, because it doesn’t effect FDIC deposits aka your and my money. It only effects money *owned* by the bank and it’s shareholders.

Now, if you bother to complain about this Fee *and* the deficit, don’t bother expecting any credibility from me.

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avatar Financial Samurai

What’s stupid is that the gov’t MADE money on all the TARP money to banks, and yet are punishing them, while the gov’t is NOT punishing AIG (?!?!) and the Auto companies who haven’t paid back the gov’t.

Guess why? B/c the gov’t owns 70%+ of AIG, so it doesn’t want to punish itself, and the auto companies employ the middle class people of america.

Double standard? Yes. Oh well.

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avatar Link Stifle

GM in a sense did pay back the government with it’s own assists, and now the majority of GM is owned by the US and Canadian Governments. Fiat has also payed off Chryslers debt to the US Government. AIG’s debt was also paid back by them selling that 70%+ of their own company.

Rewind the tape 6 months and I remember the criticism was exactly the opposite. People thought Obama was being far to soft on the banks by not giving them reconstruction deadlines like GM, now he’s answered that criticism. Also, the money the Government made back on TARP was specifically adjusted for any inflation, which right now may seem like a lot of money.

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avatar CM

I’m afraid you have your facts wrong.GM and Chrysler filed bankruptcy,new stock was issued to the government and the union.The only way the government gets paid back is if the stock reaches a price of about $60. There’s a catch though.This all comes at the expense of the bondholders, who got the worst deal in U.S. History.The american public owned most od the debr either directly,or through mutual funds,401Ks,or insurance companies. The government stripped the bondholders of assets that belonged to them and passed the money to the union and the government,when they sell the stock. How did this happen without public outrage? They did it while they kept you focused on the $165 million bonus pool. The thiefs are in the governmant, not on Wallstreet.The longer the American public is fooled by this fantasy that “Wallstreet did it”, the more they will steel from you. By the way, why don’t we drop the talk of pitchforks and torches,it’s geeting old and it’s a waste of time.

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avatar LeanLifeCoach

It’s all a shell game. One way or another the population will pay. It will be with either increased fees or with decreased shareholder value.

Flexo, cutting government expenses is the only realistic way to get our countries financial mess under control. Can I name every opportunity or even many of them? No, but that doesn’t mean they don’t exist.

http://www.cagw.org/newsroom/releases/2009/earmarks-rise-to-196.html

However we could start with the salaries of many of our leaders in Washington and public employees. While most Americans salaries and benefits were going down theirs were going up. Shouldn’t the people that serve the nation be the first to make sacrifices? Maybe they should have pay for performance pay plan like much of the private sector? If they manage our money well they can have more of it, if they piddle it away in pork and mismanagement then they get less.

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