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GreenTrader Weblog
GreenTraderTax & GreenTraderFunds
February 3, 2010
Scrap the US bank tax, Volcker Rule and get back to a G-20 global solution
"Let Wall Street Pay for Main Street" in any form – bank tax, financial-transaction tax, TARP or otherwise – is unconstitutional.
Our American constitution may have borrowed legal concepts from Europe, but our founding fathers expressly rejected the European legal concept of the nasty "bill of attainder.” The bank tax or a financial-transaction tax would be an unconstitutional bill of attainder. Click here for thoughts on why these taxes are unconstitutional.
The administration is mindful of this unconstitutional argument as it was already raised by the bank lobby’s attorneys. Thus, the administration is branding it a “bank responsibility fee” rather than a bank tax. The media calls it a bank tax.
Some of the ideas behind a bank fee make some sense. Charging big banks for future and past government services and backstops in bailouts or wind downs seems appropriate.
The banks have paid back TARP once with interest and warrants (which will be even more profitable when sold), so paying a bank tax a second time is unfair. Plus, using that double TARP payback to finance jobs or stimulus programs is against TARP legislation.
Rather than pursue this bank fee or tax concept — which has constitutional questions and which is expected to face new 59/41-friction in the Senate — the administration should get back on board with the G20, as it said it would do at the G-20 meetings in Pittsburgh and Scotland in 2009. President Obama promised the G20 and the world that he would solve global problems with global consensus.
Currently, the IMF and leading countries in the G-20 reject the administration’s bank fee/tax and Volcker Rule proposals. IMF and G-20 countries have been stating individually their preference for a more straight-forward bank insurance premium, such as adding to the FDIC premiums, but instead on a global basis for a global fund.
The bank insurance premium levy concept is constitutional in the U.S., Germany, UK, and other leading regions; whereas Germany already said the banker-bonus tax and the bank tax would be illegal there. The bank insurance levy will not be used for general tax funds and spending, or for global social causes – which celebrities and economists are pushing for. Rather, the insurance levy fund will be solely used to deal with the next (inevitable) global banking crisis; not necessarily to bailout the banks, but to help them wind down under living wills.
This problem is very important and solutions are required globally. No doubt, the world’s banks are closely interlocked. It will be hard to fix "too big too fail;" instead, a working remedy is needed. Isn’t it way too important an issue to be politicized and used as a rallying cry to raise populist pitchforks?
The IMF and G-20 may pass this bank insurance premium, and if the U.S. bank tax is passed too, U.S. banks may end up paying a third time: TARP, bank tax and then the global insurance levy.
2011 Budget - first quick comments
Regarding the Obama Administration’s 2011 Budget: We noticed one item that specifically affects dealers, but probably not traders — see page 32 of the PDF file (36/153). "Require ordinary treatment of Income from the day-to-day dealer activities for certain dealers in commodities, derivatives and other securities.”
This means dealers would pay ordinary tax rates on 1256 trading -- 60/40 treatment wouldn't be allowed for them. It was included as a proposal in the 2010 budget, too; we covered it here.
In this year's 2011 budget, this proposal seems to be passed as law — after Congressional approval first, of course.
We will review the budget and tax publisher's summaries over the next few days and offer more comments then.
January 31, 2010
The financial-transaction tax and traders’ constitutional rights
I want to delve into the constitutional law issue on selectively taxing and punishing Wall Street and traders in order to turn over those tax collections to another group who the federal government curries more favor with, such as manufacturers and unions.
As we figured for months, the G20/IMF would go for an insurance levy on banks paid to a bank rescue fund. That's legal and constitutional in the U.S., Germany, and other countries. Insurance for bank bailouts is appropriate and it fixes the problem. On the other hand, a Robin Hood tax to give charity to Main Street is unconstitutional; singling out Wall Street or traders to give money to another preferred group is a violation of equal protection and a bill of attainder. (For more on this, click here.)
Barring commercial banks from prop trading and investing isn’t about risk reduction. Governments are worried about lack of lending and a W recession. They have given banks bailouts and zero interest rates and banks have invested the money. Trading gains paid back TARP along with new capital raised to fund that incredible business. Obama is forcing banks to lend to risky borrowers in an activist strong-arm manner.
The insurance levy seems the most legal of all choices discussed. My earlier posts about the bank fee said it made some business and political sense. And it was preferable for our cause instead of a FTT. The President's budget will be read and analyzed this week and Congress will weigh in with the new 41/59 dynamic. The IMF report is expected in April and indications call for an insurance levy rather than TARP bailout-type payback. Will U.S. banks be charged an insurance levy on top of the Obama bank fee? There’s much G20 coordination needed. How can this go smoothly considering global climate control debacles? Let's see if the Senate balks at the President's bank fee. The budget debate is just starting.
Furthermore, the Supreme Court’s recent historic business-friendly advertising decision upset the Obama administration. This decision — allowing for more corporate ads and support to counterbalance current union ads — could weigh heavily in the upcoming mid-term elections. During the State of the Union address, the body language, stares, and jibes between the President and Justice Alito and his colleagues were very noticeable, and inappropriate in my view (on the President’s part).
Sen. Hatch (R-UT) — a former chairman of the Senate Judiciary Committee and currently a senior member — told Fox News the night before the State of the Union that the health care bills are most likely unconstitutional. He said it’s unconstitutional and unprecedented for the federal government to force its citizens to purchase any product or service, which certainly includes the health care bill’s provisions for mandated purchase of health insurance policies. The Senator said the comparison to mandatory auto insurance isn’t applicable because a person can chose to use public transportation. I would add that people can have others in their family drive them, too. Sen. Hatch went on to say states have more power than the federal government in this regard and the Democrats are taking us to dangerous and un-chartered waters. This reminds me of the Tea Party rants on the federal government growing way beyond its acceptable roles.
Democrats may currently control most branches of government — the administration and legislature (both the House and Senate) — but they don’t control the judiciary, which is supposed to be an independent body. For those that like more checks and balances, it’s now not a bad thing to have the Bush appointments on the Supreme Court, including Justice Alito and Chief Justice Roberts.
Health care legislation and other important Obama initiatives may face the same fate as the 2000 election Florida situation, ultimately in the Supreme Court. Does anyone believe the administration and legislature are not dysfunctional these days after the health care debacle and more?
When you come across “Wall Street pay for Main Street” rants online, I suggest writing a comment stating that it’s unconstitutional for the government to deem traders immoral and useless (they certainly are important as speculator market makers) and to selectively punish them with new taxes and fees.
This current government is further stepping way beyond the role that citizens want. A FTT is trampling on traders’ constitutional rights. Banks may not have constitutional rights as corporations, but traders have those rights as small-business traders making a living for their families.
Financial services and trading dominate America’s profits and taxes and union jobs have been exported to Asia. Neither is the fault of traders. The meltdown and the outsourcing trend is the fault of consumers not paying their mortgages and buying Asian goods at Wal-Mart. The government could have helped stop those problems, but it didn’t. Stop selectively and unfairly blaming Wall Street and traders.
Bottom line: Even with all this remaining uncertainty, I think the FTT is on its thinnest ice in a year. January 27, 2010
Journalist asks thoughts on FTT
A journalist contacted me for help with his story on the financial transaction tax.
"Mr. Green, I’d like to quote you in my story, if I may ... I’m writing a story on DeFazio’s jobs bill, H.R. 4191, for Money Manager’s Compliance Guide. Our readership consists of registered investment advisers, with a small proportion of subscribers being advisers to hedge funds. You wrote for Active Trader’s February issue concerning the small investor exemption of $100,000 in Mr. DeFazio’s bill, “This exemption is a mirage; the poorly priced markets will have higher or lower prices and that will cost every investor – buyers and sellers,” Could you elaborate just a little bit more on what you meant by “poorly priced markets” and possibly spell out how the tax would have an effect, e.g., would the tax inflate price?
I’d also like to invite any further comment you have on the bill in general. Do you still give the bill -- or similar proposals -- a low chance of passing Congress? Since publication of your article, congressional democrats have been dealt several setbacks, i.e., the GOP win in Massachusetts. Do you think that changes the game for the worse for this bill or – not to put words in your mouth – but were chances already pretty slim that the recent developments don’t make a difference? Just wondering what else you might like to say in support of your opinion, if anything."
Here's my written answer to him. We discussed it over the phone as well.
"Poorly priced markets" means wider bid and ask spreads and less liquidity due to many small-business traders (ECN market-makers) going out of business and remaining traders having less incentive to speculate and actively trade. Your inference is correct — some traders will consider the financial transaction tax to be an additional transaction cost they seek to recover by asking for higher sales prices and lower bid/purchase prices too. Even if a small fraction of investors are exempt from the transaction tax, the tax paid by the person on the other side of their trades will translate into higher purchase prices and lower sales prices, which is tantamount to the exempt investor sharing the tax burden with the taxed investor. Secretary Geithner reached this same conclusion stating this tax would fall too heavily on the retail investor.
By the way, some proponents of the tax are currently citing the existing UK stamp duty (financial transaction) tax as good working precedent for a financial-transaction tax. That precedent is purposely miss-marketed and it’s a bad precedent. Market-makers and other qualified market participants are exempt from the UK stamp duty tax, and that exemption translates to 70 percent of transaction volume. The UK stamp duty tax falls entirely on the retail investor, which directly contradicts the U.S. administration's intention. I believe UK domiciled residents get an income tax credit on their stamp duty taxes paid, and that's not part of any U.S. financial-transaction tax plan. I believe the UK stamp duty tax is intended to capture taxation on non-domiciled UK residents on their otherwise non-taxed offshore accounts.
The U.S. administration's new bank-fee plan addresses these glaring problems of taxing the small retail investor. The U.S. bank fee falls directly on the largest banks and financial institutions operating in the U.S.; it's not intended to be passed on to small retail investors. This is why the U.S. chose a narrow-targeted bank fee and Volcker Rule over a shotgun financial-transaction tax with many unintended consequences falling on investors. The UK, IMF, Europe, and G-20 are now also embracing the U.S. bank fee/levy approach over a financial-transaction tax.
The other big problem that comes with a FTT is transactions will quickly move to unregulated and foreign exchanges where the tax is not implemented. The chairman of the German exchange just made this important point too. Sweden learned a lesson from implementing a financial-transaction tax in the early 1990s; their financial exchanges plummeted in value and transactions and Swedish stock listings moved to London. Sweden repealed that tax soon thereafter. Now, Sweden is strongly urging Europe not to make this same mistake and to use a bank levy instead.
The current financial-transaction tax bills in Congress are now faulty. I believe they can't be voted on as structured. Both the Senate and House bills cite a FTT necessary to pay back TARP losses. The U.S. administration's bank-fee plan provides another preferred road map for paying back estimated remaining TARP losses. Plus, TARP recipients, including the banks and even General Motors, now have announced plans to fully repay TARP too.
There are other problems brewing for current Congressional transaction tax bills and the administration's bank fee plans. Attorneys for Wall Street claim the bank fee is a tax and it's punitive against Wall Street selectively. Taxation for a small niche is unconstitutional. Senator Hatch said on Jan. 26 the health care bills are unconstitutional because the federal government requires citizens to purchase health insurance (and unconstitutional based on the other special deals that were made as well). In light of the recent ground-breaking Supreme Court victory for corporations on the first amendment (advertising rights), I expect more constitutional threats against the financial-transaction tax and the bank fee. I think the administration will win the bank fee, as it’s not a tax in my view. But think about how the Congressional bills are titled. Let Wall Street (a tax) pay for Main Street. That's unconstitutional in my view.
In my view, we're winning the financial-transaction tax fight.
One other threat on the horizon is that celebrities are expected to do promos for the financial transaction tax — as a global tax to fund social causes — for Oxfam International. I already wrote a blog on this to tackle these celebrities and this approach. I'm waiting to see it happen before I launch these thoughts. If you're interested, I can share this with you.
The Scott Brown MA Senate victory changes things. It weakens progressives further as the President may feel he needs to move (or head-fake) to the center. Some Democrats think the President should move back toward his progressive base instead. Even if the President does, there aren't enough votes in the Senate to pass a FTT bill. The President and his chief-of-staff Emmanuel chided Rep. DeFazio in late fall over his incessant pushing for the FTT.
The President is taking the lead on tax changes in his budget due Feb. 1, and he wants the bank fee and Volcker rule over any other choices. The President’s team knows full well that banker bonuses and other selective taxation against Wall Street can be challenged on constitutional grounds. Rep. DeFazio is a big loser here!
Update: This same journalist sent follow up questions after the President's State of the Union address.
Bob -
A follow-up question for you. Last night, the President called on the Senate to pass the House jobs bill in his state of the union address. As we've discussed, that bill is financed in part by the transactions tax. Does this increase the odds of a transaction tax succeeding in some form, or would it have to be stripped from the bill if it is to pass the Senate? Your thoughts? Thanks again,
Bob – I misspoke. H.R. 4191, the bill with the transaction tax, is not the one that got approval from the House. Obama was referring to a different bill last night. Sorry for the mistake!
My quick reply -
I thought of the same thing during the speech and I think the financial transaction tax (FTT) will be stripped out of any jobs bill. It's counter-productive and odd to cause traders and others in the financial-services industry to be fired as an unintended (or intended for some) consequence of passing a financial-transaction tax - all for the stated purposes of creating new jobs in a "jobs bill." This is the main point of our Petitions at http://www.rallycongress.com/greentradertax-traders-association1/ .
The President was also very firm in the State of the Union address about 'not having passed one dime of new taxes on the middle class' and this FTT tax would fall mostly on the middle class as concluded by Secretary Geithner. The government's piggy-back seems to be unused and repaid TARP funds and the President's chosen means for paying back TARP is his administration's bank fee plan, not a FTT (financial transaction tax).
Regarding the follow up clarification about HR 4191 - The Senate can work up their own version of a jobs bill and include HR 4191 too I presume.
A colleague says, just to be clear there is no FTT is any jobs bill currently and I highly doubt a FTT will show up in the Senate's jobs bill. If a FTT were going to show up in a jobs bill it would have showed up in the house version. It sounds like any jobs bill that does come about (in the Senate) is going to be scaled down from the ambitious jobs bill put forth by the house.../
January 23, 2010
Is the Volcker Rule a good or bad idea at this time?
This is a comment for the Barron's article today The New Dismal - The Volcker Rule comes too late. Stocks thrashed by a headwind of negative news.
The public's perception of Mr. Volcker is very high due to his age, his reputation, and his strength. You write, "Paul Volcker, whose staunch independence while at the helm of the central bank from 1979 to 1987 managed to earn him the enmity of both the Carter and Reagan administrations, had been on the outs with the Obama inner circle, notwithstanding his high-falutin' title."
Consider the first big market crash during of our lifetime: Black Monday October 19, 1987. This devastating crash occurred just after Volcker's reign as Chairman of the Federal Reserve (he left in August 1987).
Today, the public holds the Fed Chairman responsible for easy money before market crashes. Why do we put Volcker on such a high pedestal? Isn’t Volcker (in his last major U.S. post) in the same easy-money, lack-of-regulation pre-crash group as Bernanke, Greenspan, Geithner, and Summers? Yes, he broke the back of inflation, but his reign led to the biggest crash of our lifetimes too. Shell-shocked ex-Chairmen always become overly conservative. Volcker is the oldest and most out of touch of the group too.
Volcker has been on the outside a long time and spends most of his time in Europe. During the 2000s, Mr. Volcker was very involved with UN and multi-lateral activities, not U.S.-centric activities. Is Mr. Volcker leading the charge in the Obama administration for a Euro-U.S.-G20 financial reform cooperation pact, among the likes of politically desperate UK Prime Minister Brown, French President Sarkozy, German Chancellor Merkel, and the new European President? Even more troubling: The UK Tory party — expected to take control in early 2010 — said it would follow President Obama’s lead on the bank fee. So far, European leaders have dismissed the Volcker Rule as being good for America only perhaps, but not Europe.
Secretary Geithner put the damps on the financial-transaction tax (FTT) in the G20 in November and now after the Volcker Rule bombshell, PM Brown says there's an opening to bring it back to life. A FTT would destroy financial markets. Do we want U.S. financial reform and taxation to be swept up in a global “tax and reform rush” (rather than gold rush) to set the standard for political gain and control? Please slow this train wreck down! Early indication in Europe is they don't want a financial-transaction tax and prefer a levy or insurance premium assessed on banks instead - what we thought all along.
Mr. Volcker's ideas may have merit for some (not me), but deploying them as a decoy for political gain during a fragile economic recovery is very dangerous.
Trading gains and alternative investments on Wall Street saved America! Had banks not made billions trading this past year, the Main Street recession would be worse and Wall Street and the markets would have tanked. TARP gave Wall Street the springboard it needed to snap back based on trading; not only was TARP paid back, but the stock markets have been the engine leading Main Street back. We need to be patient for the jobs to return soon, instead of derailing the train. Government-forced lending to failing businesses and home owners is the failed recipe of the early 2000s.
Did Volcker’s leap to the top of President Obama’s advisors weaken Secretary Geithner and Chairman Bernanke? That would be very unfortunate too. Secretary Geithner is the best hope for traders in defeating a FTT — our biggest concern at GreenTraderTax.com Traders Association — and for sensible reform on Wall Street. It was reported that Secretary Geithner originally rejected the Volcker Rule. Rather than sacrifice Geithner to the populist mob, the President should axe Emmanuel. He was the one that strong-armed Chicago-style sausage-making politics in the health-care bills.
I hope the President isn't trying to win further populist stripes against Wall Street by sacrificing Geithner and Summers as being too close to Wall Street. And Bernanke isn't getting enough support either. Republicans are certainly not going to ride in to save Wall Street. Good thing Schumer isn't up for election this November; he would be another Dodd casualty.
Mr. Volcker seems a little out of touch about the innovations on Wall Street. He fully understands banker abuse and over reach, but that's not enough of a reason to throw the baby out with the bath water.
Is Secretary Geithner safe?
There's much discussion on message boards and in the media about Secretary Geithner's future in light of President Obama's recent choice of the Volcker Rule over Geithner's original objection to it.
I've said all along Secretary Geithner was our man to defend against a financial-transaction tax, both at home and abroad.
If the President dumps Geithner, it will show tremendous weakness on his part, and that he doesn't have the backbone to lead through a populist crowd. Obama has stood by Geithner through personal-tax allegations, AIG memos, bailout deals, and more. Plus, Secretary Geithner is doing a very good job. Geithner set up the President to lead the world on the bank fee plan and financial reform, and ward off a financial-transaction tax.
The President chose Volcker over Geithner for the second part of his bank plan, to rein in moral hazard and "too big to fail." The first part of the plan was the bank fee and it only addressed TARP pay back, not moral hazard.
What was Geithner's second part of the plan? He originally disagreed with the Volcker Rule, to separate commercial lending from proprietary trading and alternative assets. Geithner is wise enough to understand that crisis-forced-fed bank mergers under TARP - JP Morgan Chase and Bear Stearns, and BOA and Merrill Lynch - and now forced divestitures just one year late is flip-flopping government interference with excessive disruption in the marketplace.
Did the President panic after the Scott Brown MA Senate seat victory - a tide-turning referendum on health care - and roll out Volcker immediately to reclaim the momentum?
Perhaps Summers and Geithner wrote a memo in support of the Volcker Rule over the holidays (as Summers said on CNBC), but that may have been their comments on that one choice, among other better choices in their view. Was the Volcker Rule decision made before or after Brown’s victory? If it was made afterward, it certainly is even more suspect.
Please be very supportive of Secretary Geithner everywhere possible! Bernanke not being confirmed is different from the President firing his Treasury Secretary, and both at the same time will cause havoc.
January 21, 2010
Volcker Rule and opportunities for traders in banks
If the new Volcker Rule is enacted, bankers will have a choice to make between commercial bank lending or investment management. Portfolio managers in banks can take control of their own destiny, act as entrepreneurs, and do great things with these changes.
Note: We covered this topic on our Jan. 21 Podcast.
Chairman Frank has said it will take three to five years to phase in the President’s new rules; Congress doesn't want to cause a fire sale for banks on divesting of businesses. Thank goodness for that, but business planning still spans several years and this will cause great shock during a fragile recovery. I have said for months that proprietary trading gains helped save the banks during this recovery. I think these new Volcker Rules are a bad idea and there are better ways to address their concerns. But that’s a different article.
Wasn't it the government who forced Merrill Lynch (an investment bank) into the arms of Bank of America (a commercial bank) during the height of the financial meltdown? This happened with JP Morgan Chase and Bear Stearns too. Another troubling concern here is that the UK's conservative shadow Treasury Secretary said he may follow suit with similar rules. Keep in mind that President Obama and Secretary Geithner are trying to coordinate financial-reform on a G-20 basis.
Commercial-bank lending has pros and cons. The pros are very low interest rates from the Fed, high lending rates for credit card customers, and reasonable lending rates for mortgages and business loans. The profit-interest spread is very large. The downside: Lending is a very dangerous business, especially in America where bankruptcies can almost be purchased at a big-box store quickly, cheaply, and with few consequences. Americans not paying their mortgages is how we got into this mess in the first place.
Investment-management businesses have pros and cons too. They also benefit from low interest rates on leverage, even if they aren't getting the even lower rates commercial lenders receive. There are lots of risks in trading, especially with market disruptions, and that's what the White House and Mr. Volcker want to avoid. Most on Wall Street understand these risks and have done well overall in investment-management businesses.
The Volcker Rule simulates Glass-Steagall and will lead to many bank break ups, mergers, acquisitions, and sell-offs as banks choose which side they are on.
The Goldman Sachs fiasco led to this action more than anything in my view. Goldman packaged CDOs and sold them to investors, while shorting them in their own investment-management businesses and client investment-management businesses like Paulson’s fund (where billions were made). Which hat was Goldman wearing? Principal, banker, fiduciary, broker, advisor, counterparty, and/or adversary on the trade?
These same concepts apply to our code of ethics as CPAs. You can be a CFP, attorney, and CPA all in one, but if you say CPA for attest services, you can’t include those other titles or roles in the client relationship.
Here’s the important point for traders inside banks. Don’t just sit back and let your bank package you and your team up along with your portfolio and sell you all off for their own profit. Take control of the situation and try to forge your own deal in your best interests. Plenty of portfolio managers have left AIG to simulate the good (and not bad) business they had. Plenty of marketable securities and derivatives are available to purchase with new investor money (the same investors) and you can be in control with much greater profit opportunities. I’ve seen fortunes made in this manner over the years, when banks need to cast aside great businesses.
This is an excellent opportunity for portfolio managers to set up their own businesses.
Back to a financial-transaction tax (FTT) concern for traders. I think the White House has announced enough major change with the bank fee and Volcker Rules — on top of financial reform efforts already underway in Congress. These changes will be disruptive to the economy and will cause great debate in Congress and within industry. How and why should the White House or Congress also pursue an even-more troubling FTT? The White House financial reforms and bank fee seem to address leadership's concerns and it follows up on what they said they would (and wouldn't) do. The White House said no to a FTT and so have all their key players: Geithner, Summers, Goolsbee, Volcker, and more. Keep it that way.
Follow up note. In my Jan. 13 blog "Levy (bank fee) is insurance premium for banks," I asked "will banks skimp on risk management more going forward, figuring they're paying good money for a government insurance plan?" In retrospect – after the Volcker Rule announcement – it’s clear the bank fee wasn't the administration’s complete solution, because the bank fee doesn't rein in moral hazard investments and trading by commercial banks. The Volcker Rule corrects that remaining problem, by not allowing commercial banks (who pay this bank fee) do their own proprietary trading and alternative asset investing. January 14, 2010
Will Congress pass the bank tax?
The bank tax: Will Congress approve this Presidential budget item?
Pundits are forecasting the Senate may say no to the President's proposal for a "financial crisis responsibility fee" (i.e., bank tax) as part of the President's 2011 budget out in February. I disagree and believe the bank tax will be enacted, perhaps in a modified form.
The first break down of political sides should be the Democrats in the House and Senate voting to support the President. Democrats are already trying to pile on and win some thunder (and sausage fund raising) with bank bonus tax bills too — and those shouldn't pass.
Will Republican Congressmen rush to say their standard line — "no new taxes"? Some have already, but others may refrain. Will New York Congressmen speak out against this significant bank tax? Some may, but others such as Senator Schumer (D-NY) probably will not. This may explain why Schumer has been silent lately, as he was probably in the loop on these developments. Same for Senator Dodd (D-CT) — this explains his recent retirement announcement even more.
Most Republicans have been very vocal against the TARP bailouts and Wall Street wheeling and dealing.
The left-progressive populist movement wanted a wider financial-transaction tax — the Congressman DeFazio (D-OR) and Senator Harkin (D-IO) bills that our Traders Association is fighting with petitions. The left wants to appeal to the more important political voting ground of Main Street vs. (tiny yet rich) Wall Street in the Tale of Two Cities.
The Tea Party populist movement supports the Republican platform on no more big government spending, tax increases, more regulation, and intrusion.
This is a tricky political battle because it's confusing which side better represents Main Street. Both want to appeal to those voters.
The President's bank tax proposal is partially intended to suck the wind out of populist sails by charging $100 billion of new taxes to Wall Street — bringing politics back toward the center, where he must operate from as President now. Lingering populist anger is also destructive to the recovery and governing.
Are Republicans going to rush to defend Wall Street, who is almost non-defensible in the public's view at this point considering the overall environment on these issues?
If Republicans force a Presidential budget veto vote over the bank-tax issue, they will set themselves up for only losing choices in my view. On the one hand, defend Wall Street — and huge bonuses paid to executives rather than giving that money to TARP-lending taxpayers — which could serve to lose more Main Street votes. Or, on the other hand, support the bank tax and be hypocritical on their overall "no new tax" pledge.
I think Congress will approve the President's budget on the bank tax and the President will use his political capital to make sure it happens. The President has declared Wall Street vs. Main Street economic issues a prerogative and he won't let Congressional sausage-making process mess up the economy the way it has with health care. The President is right! I expect him to table the financial-transaction tax bills and new bonus tax bills too. Secretary Geithner and the President were clear on these being bad ideas and you can take their consistent no-drama Obama style to the bank. Wall Street will continue to protest about the bank tax and there will be some deal making I presume.
This whole saga seems to be coming to a head in the U.S., just a short time after coming to a head in the UK with the banker bonus tax. Most of all, we don't want a nasty financial-transaction tax on traders and investors!
Interestingly, some CNBC anchors like Erin Burnett, who previously gave credence to a wider financial-transaction tax against traders, couldn't wait to protest about the Wall Street tax. Are these anchors partisan toward big money Wall Street and big corporations vs. the little trader (and their viewers)? How can they support a financial-transaction tax on the little guy but not on Wall Street? I guess there are politics, sponsors, and lax Chinese Walls in the journalism business too. President's big-bank fee saves online traders from a wider financial-transaction tax
President Obama’s big-bank fee is covered in the media today, including New York Times and Wall Street Journal. The President is scheduled to unveil it soon.
This bank fee (tax/levy/insurance) has been in the making for a while and it will be hard to stop once it's in the President’s budget. The public on both the left and right have anger toward TARP bailouts and Wall Street. The Financial Crisis Commission is taking Wall Street to the woodshed and this is softening the target and empowering the taxman.
Wall Street made windfall-type profits during the financial-crisis recovery with excessively low interest rates from the Federal Reserve, so it had a license to print profits with a crisis-large yield curve. The public views Wall Street as Crisis-Profiteers, like War Profiteers, especially witnessing what they view as obscene levels of bonuses during this fragile Main Street recovery.
The government's proposed bank fee of 0.15 percent (15 basis points) assessed on big banks' non-tier one asset positions (the riskier ones) is a new big-bank-only transaction tax. The government promised (so far with the leaks) that this new bank tax can't be easily and directly passed on to consumers and investors of all types including online traders. Let's get more details today and in the President’s budget, and listen to complaints from the banks which may bring to light valid unintended consequences.
The 15 basis point fee on bank liabilities is like a 15 basis point interest increase on government-provided debt. Banks are borrowing at close to zero basis points from the fed which is their biggest benefit during this crisis (much bigger than TARP loans). Think of this bank fee as a surcharge interest rate to the government and the borrowing costs are still far below pre-crisis levels. Raising rates would hurt more.
If this bank fee/tax is the mechanism for paying back remaining TARP losses, it undermines the Congressional bills calling for a wider financial-transaction tax.
The financial-transaction tax proponents who don’t want to give up the fight, the rebuttal is to say this big-bank fee is a financial-transaction tax on risky too-big-to-fail positions. Plus, it’s the only way to protect Main Street consumers and investors – the wrongful targets – from a wider and unfair financial-transaction tax. End of story. The proponents will soon have this bank tax, so why try to extend it to the little guy?
Does this new bank fee mean online traders are safe from further attack? It's way too early to fly the “Mission Accomplished” banner. Hardcore proponents including economist Dean Baker (out to sell his upcoming book on the subject) won't give up on a financial-transaction tax. But, with this new big-bank fee, the administration is taking a wider financial-transaction tax off the table in the U.S. for the foreseeable future. It will be hard to pass one in any major financial center unless all leading centers cooperate to enact it. With the U.S. opting out for now, global enactment in my opinion has even less of a chance of passage than a global climate control treaty over the next few years.
Being spared from a wider financial-transaction tax comes at the expense of Wall Street’s big banks and other financial institutions (more than $50 billion of capital). I feel they have recovered from the crisis, are growing nicely again, and are earning good bonuses. That being said, I believe they should be able to weather this government storm. In our case, a wider financial-transaction tax would put traders out of business overnight, whereas this big-bank fee budget proposal is just an additional and affordable cost of doing very profitable business for Wall Street.
Traders still face many new obstacles coming from Washington such as restrictions on naked access, reined in leverage, higher capital, more restricted position limits, and other regulatory rules. In addition, a Senate proposal contains a 1-percent Medicare tax applied on earned income, plus for the first time investment income (a ground breaking change in the tax code).
Don’t forget carried-interest tax breaks could be repealed in 2011 per President Obama's 2010 and 2011 budgets. The House alone just passed a bill to repeal carried interest a year earlier in 2010, but it's doubtful the Senate will follow suit. Capital gains and qualifying dividends taxes are going up in 2011 to 20 percent from 15 percent.
We have to continue watching our backs and fighting together. Plus, we will have to hammer down fringe nails on the financial-transaction tax when they arise, which I expect will still be fairly often (if not in the U.S., then in Europe).
Keep in mind this is just a proposal for a Presidential budget item and the President needs Congressional approval. Plenty of things can go wrong so we must remain vigilant. But this is shaping up to be a foundation stopping the financial-transaction tax and we all know how much damage that would cause to the American economy.
I heard on CNBC the banks were surprised to learn about this new big-bank transaction tax. How can big banks claim that level of ignorance? For months we have been fighting a very public call for a financial-transaction tax intended to address infractions on Wall Street. Main Street traders claimed the tax would fall too heavily on them and Wall Street would deflect it or win exemptions. That would be perverse. The President talked about this big-bank tax in August too. Did Wall Street risk-management departments miss this one too? We asked Wall Street to help in our efforts and they raised a blind eye. I don't think we have to help them (which wouldn't work anyway).
Finally, we give our deepest condolences to the people of Haiti in this horrendous disaster. If you're looking to offer support and you're not sure where, consider donating to The Harvest of Haiti: 4233 State Rd. Fort Gratiot, Michigan 48059. January 13, 2010
Levy is insurance premium for banks
The suggested bank levy is an "insurance premium" for risky debt-financed assets on "too big to fail" banks' balance sheets. Will this levy capture bank SIVs and other off-balance-sheet debt-financed assets too? The leaks of the bank levy plan indicate it excludes equity (not leveraged) and FDIC (previously) insured deposits. You can't charge an insurance premium twice.
This Obama administration bank levy plan addresses the core problem of the meltdown in my view. As the meltdown got underway, every level of backstop failed. First, diversification of risk through packaged CDOs, then weak ratings and underwriting, undercapitalized insurance, and weaker reinsurance, and finally, the risk was concentrated at the Wizard of London Oz AIG Financial Products — a guarantor mirage writing swaps with any takers with a pulse and pocket book. There was no true backstop other than central banks and governments.
After TARP bailouts, the government now realizes its true value as the backstop of last resort and it's forging a proper formula and billing approach for this service. Yes, the price may be too high and the process too heavy handed, but they're probably the only counterparty with more power than Goldman Sachs itself.
If this bank levy insurance premium succeeds — and it's too early to tell — banks will simply have a higher carrying cost for taking uninsured debt-financed asset positions. As always, there will be unintended consequences. Will the levy cause some banks to take even greater risk to pay for these additional position costs? Will it freeze other banks from these activities all together?
In Wall Street logic, how is this concept wrong? It's not a tax. It's not a levy — it's Superman getting his insurance premium.
The pundits and politicians have successfully (so far) re-branded a bank tax as a bank levy (punishment), and now as "bank insurance" on items that are uninsured yet caused a moral hazard government backstop.
Yes, the government has been paid back most TARP bailout funds, but it didn't get a Warren Buffet-type Goldman deal and certainly not a spectacular Wall Street deal either. Good for the government; it's collecting its share of the bonus loot. Hopefully this puts out all fires.
Read Freakonomics. A school wanted parents to pick up children on time, so it passed a late-fee charge. Parents figured they could pay the fee and come late, resulting in more late pickups — the opposite effect intended by the school. Will banks skimp on risk management more going forward, figuring they're paying good money for a government insurance plan? You have to wonder if the government is just scrambling in its own debt crisis and acting irrationally all together. What makes sense on one hand can cause problems on the other.
Follow up note. In my Jan. 21 blog "Volcker Rule and opportunities for traders in banks," I point out how the Volcker Rule addresses the remaining problems not addressed by the bank fee plan (which we referred to as a bank levy at the time of this blog, before the bank fee was formally announced). As stated above, "will banks skimp on risk management more going forward, figuring they're paying good money for a government insurance plan?" In retrospect – after the Volcker Rule announcement — it’s clear the bank fee wasn't the administration’s complete solution, because the bank fee doesn't rein in moral hazard investments and trading by commercial banks. The Volcker Rule corrects that remaining problem, by not allowing commercial banks (who pay this bank fee) do their own proprietary trading and alternative asset investing. January 12, 2010
President Obama supports a bank levy over FT tax
Good news on the financial-transaction tax front: Passage of this tax in 2010 doesn’t seem likely. President Obama seems to be supporting Secretary Geithner's preference for a bank levy over a financial-transaction tax — music to our ears.
The President makes tax changes in his annual administration budget due in February. Congress then reviews the budget. In President Obama’s first annual budget passed in early 2009, the President allowed the two upper-income tax-bracket rates to expire as scheduled in 2011, and he proposed to repeal carried-interest tax breaks in 2011. The House recently passed a bill to repeal carried-interest tax breaks a year early in 2010. It’s doubtful the Senate will follow the House on this acceleration. If it doesn't, a 2011 repeal isn't a sure thing yet either.
In my view, the President and Secretary Geithner have declared bank levies or a financial-transaction tax or other bank taxes a prerogative to address in the President’s budget. Both the President and Secretary seem uncomfortable trusting this delicate economic issue to the tardy sausage-making process in Congress. The President has shown displeasure with Congressman DeFazio, the main proponent of a financial-transaction tax. Too many in Congress have also piled on Secretary Geithner, both weakening the Secretary (and therefore the President). The President has learned from the health-care debate, as well as political errors made on the other side of the pond on banker and financial-transaction taxes.
This issue should be teed up for traders. I expect the President and his team to continue disclosing the administration’s bank levy plan with the politically sensitive release of more and more details as time goes by. Financial industry groups and others (like unions) will cry foul on various elements of the plan. A final plan probably will be acceptable to industry and included in the President’s final budget. Perhaps some crucial details will still be lacking in the published budget, which is customary. Congress is expected to call for punishment on Wall Street, and populist furor — which is greater than most people realize — should be assuaged with a significant and targeted bank levy.
After all, a financial-transaction tax falls more on Main Street investors than on Wall Street itself. As we have said, the bank levy approach is narrowly targeted on big banks. It’s a lot easier to collect billions from 20+ banks — who are ready, willing, and able to bite this bullet — vs. collecting financial-transaction taxes in small amounts from hundreds of millions of upset taxpayer/voters.
I expect Congress to drop the financial-transaction tax from its current bills; the tax’s fringe-element sponsors will have to back off. The President is claiming this area for himself and showing great leadership in this regard. Congressman DeFazio will remain in the President’s woodshed.
I’m not saying I agree with a bank levy, considering that most banks have paid back TARP with dividends. But that’s not the point here today. This populist fury is almost out of control and the President needs to swoop in to show leadership and strength. He’s certainly up to the task. This bank levy is going to raise plenty of needed revenue from financial-service powerhouses. The bank levy is fair and well targeted in that regard.
You may have heard the media and pundits refer to a bank levy as a tax. Don't worry; they aren't referring to the dreaded financial-transaction tax. "Tax" is more understood and easier to use. Plus it calms populists more. Plus they may save the levy part for the new FDIC plan.
The bottom line is the administration is cooking a tax/levy on banks and not traders. They will find their culprit — high risk transactions — and tax them. They have the benefit of hindsight on the UK banker bonus tax mess, but there will still be huge unintended consequences on this new "bank tax." Picture this: Buffett wants a huge derivative trade and Goldman takes the other side of the trade. Goldman pays a huge tax and Buffett gets off tax-free. Goldman must price that tax into the trade, so it's effectively passed on. Our same market maker argument but on steroids.
Table the financial-transaction tax on investors first and then tackle bad thinking on these other taxes.
Also, what’s happening on the other side of the pond? I predict embattled UK Prime Minister Brown will back off discussion of a global financial-transaction tax after world leader President Obama puts this issue to bed, choosing a bank levy instead. Secretary Geithner saying “no” to PM Brown wasn’t good enough, especially since our Secretary is on thin ice (with AIG disclosures and more). The President’s support on this issue reinforces Secretary Geithner as well. These are the right moves all the way around and I remain very pleased with President Obama and Secretary Geithner on this front.
Next, I expect the IMF to publish its report in favor of a bank levy over a financial-transaction tax too, no later than June 2010, and probably sooner in April, if the UK elections allow for that perhaps disruptive event. Hopefully, the Tories will win the UK elections and put the financial-transaction tax to rest too. Germany is divided on the issue and only France can be counted on for a “yes” vote. That’s certainly not enough. No major country will vote yes on a financial-transaction tax unless the entire world embraces it.
Finally, hopefully Main Street economies around the world will recover and banks will loosen credit. If there continues to be a Tale of Two Cities between Main Street and Wall Street, there will continue to be populist anger breeding grounds for bringing a financial-transaction tax back to life.
We aren’t out of the woods yet, but I see a clear path to victory for our cause. Keep fighting!