Banks, experts eye possible ways around Obama fee

NEW YORK (Reuters) - No sooner does Washington propose a new tax than an army of experts tries to figure out ways to avoid it.

That is already the case with U.S. President Barack Obama’s proposed fee on banks, designed to ensure that Wall Street banks pay up to $117 billion to reimburse taxpayers for the financial bailout: Bankers, lawyers and consultants are already considering ways to avoid paying the fee.

“This law could be a real boon for lawyers and consultants like me. There are tremendous opportunities for coming up with new mechanisms to avoid it,” said Bert Ely, a bank consultant in Alexandria, Virginia.

The fee idea has been public for only a matter of hours, so it is tough to say precisely how to avoid it. Final wording is a long way off as the proposal wends its way through the legislative process.

But there may be some ways to avoid the charge, which would target the biggest financial institutions and would be based on the size of their liabilities. It would exclude deposit liabilities already guaranteed by the Federal Deposit Insurance Corp.

The Obama administration hopes this fee will give banks and other companies an incentive to shrink bloated balance sheets, and some companies likely will shed assets. But others will look for ways to reduce their taxable liabilities without lowering their overall asset base.

One way for that to happen could be securitization, Ely said. For example, in behavior that would be reminiscent of some of their pre-financial crisis strategies, banks could sell loans to a trust or conduit residing off their balance sheet and that entity could finance the loan.

Accounting rule makers are trying to make it harder for companies to move assets into financing vehicles and they may successfully close all loopholes linked to these types of entities, but there is no guarantee they will succeed.


Banks might also look to gather more deposits through retail brokers and private bankers, known as “brokered deposits,” because those deposits would not be subject to fees.

If more large companies are competing for deposit dollars, borrowing money could become more expensive for the thousands of smaller banks that rely almost exclusively on deposit funding, analysts said.

“This tax could indirectly fall on the banks that the government is trying to support,” said James Ellman, president of hedge fund Seacliff Capital.

Another possibility is for Wall Street to invent new securities that count as preferred equity for the purposes of the tax, but act a lot like debt otherwise.

Still, the law could be written to minimize these types of loopholes, said Dan Alpert, managing partner at boutique investment bank Westwood Capital in New York.

“A raw tax on these types of net liabilities is a pretty hard thing to get around if the law is written right,” Alpert said.

Regulators and analysts are increasingly intolerant of financial institutions using off-balance sheet vehicles and other legerdemain to change the appearance of their books without really reducing their risk, Alpert added.

But several senior Wall Street officials that spoke to Reuters about the tax said that work-arounds may be possible. Many major banks have entire departments geared toward helping clients and the banks themselves reduce their tax bills.

“There’s enough money involved here that it will be worthwhile for banks to figure out how to minimize their obligations,” said Ely.

Even Obama acknowledged that possibility on Thursday.

“Instead of sending a phalanx of lobbyists to fight this proposal, or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities,” he said.

That might prove to be wishful thinking.

Reporting by Dan Wilchins; editing by Andre Grenon