January 12, 2010 / 10:36 PM / in 9 years

Success of Obama bank fee idea tied to public anger

WASHINGTON (Reuters) - Widespread public anger against Wall Street bankers returning to multimillion dollar paychecks so soon after the financial crisis gives momentum to the Obama administration’s bank fee idea.

The White House may include in its fiscal 2011 budget proposal a bank fee to recoup taxpayer losses associated with the $700 billion government bailout fund.

That fee could exceed $100 billion in total and hit the largest financial firms with up to a $20 billion charge, according to some analyst estimates.

It is a move by the administration to show that it is coming down hard on big financial firms, just as some are poised to report strong profits for 2009 and hefty bonuses.

Critics of the quick rise in Wall Street profits and stock prices argue that it has only been possible because of extreme government support in the financial markets.

When the large financial services firms disclose their earnings in the coming weeks, Congressional and public support for the bank fee idea could really gain steam.

“We remain quite concerned that this will quickly pick up political momentum in this populist era,” said a report from Concept Capital’s Washington Research Group. “So while the odds are now against enactment, this could change.”

The report estimated that Bank of America (BAC.N), JPMorgan Chase (JPM.N) and Citigroup (C.N) could each pay at least $20 billion, depending on how the fee is structured.

The White House has said it wants to use the bank fee to recoup the money spent to bail out the financial system but has yet to spell out details of the proposal, including the amount of such a fee.

Treasury’s latest estimate on the ultimate taxpayer loss from the $700 billion Troubled Asset Relief Program (TARP), that began in late 2008, is $120 billion.

However, Treasury believes that amount is a conservative projection and has repeatedly downwardly revised its loss estimates.

Marshall Front, chairman of fund manager Front Barnett Associates, said slapping the big banks with a fee is a politically appealing idea on multiple fronts.

“People are looking for culprits, villains, and for reasons to punish those people” responsible for the financial crisis, Front said. “It comes at a time when we have extreme deficits and this fits neatly into that situation as well.”

But a fee would also be a financial hit for firms that taxpayers were trying to rescue not so long ago, he said.

Scott Talbott, an executive with Financial Services Roundtable, said a fee would reduce banks’ ability to lend and stifle the recovery effort. Overlooked is the fact that bank repayments of TARP funds have generated about a 10 percent return, on average, for taxpayers, he said.

CAUTIOUS RESPONSE

Still unclear is how much support a new bank fee could gain in Congress.

Democratic House Speaker Nancy Pelosi has said in the past that a proposed tax on financial transactions “has a great deal of merit” but this tax idea garnered a less enthusiastic response.

“While we have not seen any specific language from the Administration, Congress will certainly examine any serious proposals that will lower the deficit and recoup even more of the TARP funds for the taxpayers,” said Pelosi spokesman Brendan Daly.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, was even more cautious, saying on Tuesday that her agency is not involved in the administration’s tax policy and could not comment on the proposal.

Republicans, on the other hand, criticized a fee.

Representative Spencer Bachus, the top Republican on the House Financial Services Committee, said there is no way the administration can design a bank tax that will not be passed on to consumers and investors.

“The tax will only drain capital from the financial system at a time when it’s needed to create jobs and fuel economic growth,” he said in a statement.

However, a debate on the merits of the proposal could fly out the window if the public gets mad enough, and lawmakers seek to punish the banks.

“The banks obviously will fight like crazy, but given the anger that exists toward them, the usual anti-tax arguments might not work here,” said Stan Collender, a long-time budget watcher at Qorvis Communications, in an email to Reuters.

“Without seeing it, I’d give it a 60-40 chance.”

The American Bankers Association could not be reached immediately for comment.

Reporting by Karey Wutkowski and Steve Eder with additional reporting by Andy Sullivan, Thomas Ferraro and Caren Bohan; editing by Carol Bishopric

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