Relax on the TARP tax

It's not the reckless and punitive disaster the banks are making it out to be. In fact, it makes sense.

By Kim Peterson Jan 19, 2010 3:26PM
Kim PetersonAll the whining from banks about the Obama administration's TARP tax is starting to get old.

For one thing, the tax is designed to wring about $9 billion from the banks next year. To put that in perspective, consider this: Bank bonuses alone will hit $145 billion this year. The banking industry made $250 billion in earnings before taxes and loan-loss provisions this past year.

Is it any wonder that investors shrugged when the tax was announced?

So let's right now dismiss any claims that the TARP tax will amount to financial hardship on the banks. But how about the question of fairness? We're hearing that quite a bit too.

Yes, the major banks (except for Citigroup) did, for the most part, repay their TARP loans with interest. And in a cut-and-dry, black-and-white world, you could look at that and say, "Hey! No fair. They shouldn't get taxed as well."

But nothing in the financial industry, or in the enormous meltdown that cratered it, is cut and dry or black and white.

The U.S. government still is in the red for TARP payments. The New York Times says TARP losses total $117 billion, while The Wall Street Journal pegs the number at $120 billion (but then, a day later, at $60 billion).

Whatever the amount, it's clear that money is still owed under TARP. Who owes it? I'll give you a hint: It starts with "A" and ends with "IG."

American International Group (AIG) must still repay some $83 billion in outstanding debt and equity, company officials have said.

Other insurance companies owe money, too. Is it appropriate to get that money from the banks that have repaid TARP?

I say yes, and here's why: The banks were more than happy to hold AIG's hand and skip down the road to financial ruin together. Banks bought mortgage-backed securities and other complicated financial instruments from AIG during the good years, and made a pretty penny in the process.

Then AIG imploded, and the government had to come in with a bailout. Well, the banks wanted to collect on those securities, of course, and they did -- to the tune of 100 cents on the dollar.

In fact, Goldman Sachs (GS) reportedly received $14 billion for essentially fueling the bad behavior at AIG. Other banks were involved too.

So AIG repaid $62 billion in derivatives at 100 cents on the dollar, according to James Anderson at Minyanville, and now AIG can't afford to pay back its TARP money. What a surprise.

The banks never should have received 100 cents on the dollar for making bad bets with AIG that went sour. The government should not have allowed these golden repayments, and, in its twisted, bureaucratic-heavy way, it's trying to get that money back now.

The banks were heavily involved in AIG's spiral into bailout hell. They profited from AIG when they could, and now, they're so indignant about being pressed to essentially cover AIG's losses that they're thinking about suing.

The TARP tax isn't a perfect proposal. But it's not the horrific crime the banks make it out to be.

James Kwak looks at this another way. Since the large banks enjoy a too-big-to-fail subsidy from the government -- with a guarantee of rescue in hard times -- they should pay a fee for that comfort. It's sound regulatory policy, he adds.

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