Last week, Senate Banking Committee chairman Chris Dodd (D-CT) announced that Democrats are going to go it alone on financial regulatory reform, as negotiations with the committee’s ranking member, Sen. Richard Shelby (R-AL), were at an “impasse.” One of the sticking points has been the Obama administration’s proposal to levy a $90 billion tax on the largest financial institutions, which Shelby said he opposes outright, adding that if the Democrats were to pursue implementing the tax, they would “risk unravelling much of the bipartisan support already reached.” Republicans as a whole, in fact, have been courting support from the banks, on the grounds that they will block significant regulatory reform.
If ditching a tax on the very biggest banks is the price of bipartisanship, than it was wise for Dodd to move on. After all, the tax is pretty tame, and is only aimed at recouping the money lost on the Troubled Asset Relief Program (TARP). I’ve argued that the tax can go further (maybe by making it permanent) and the regulatory reform bill that the House passed in December had a smart provision mandating that banks pay into a fund, which will be used to unwind failing firms without using taxpayer money.
Today on CNBC, former New Jersey governor and Goldman Sachs CEO Jon Corzine said very much the same thing, endorsing the bank tax and likening it to the deposit insurance that commercial banks pay:
Nobody watching this is going to like this, but I basically think the idea, this bank tax, is just another form of FDIC insurance. I think that the industry ought to both pay back but also prepare for the next financial crisis…There was a huge tax to get us out of Long-Term Capital [Management], Goldman Sachs had to put, I can’t even remember, $350 million at the time. This is pay-me-now or pay-me-later. I would rather set up the systems to deal with resolution of the problems over a period of time, which is what the FDIC insurance rates are about.
Rep. Luis Gutierrez (D-IL) put it similarly in pushing for the House’s version of the tax, saying “let’s create the fund, just like the FDIC, so when we need to resolve [a financial institution], it stands.” And FDIC Chairman Sheila Bair also agreed, saying that “Congress should establish a Financial Company Resolution Fund (FCRF) that is pre-funded by levies on larger financial firms — those with assets of at least $10 billion…We believe that a pre-funded FCRF has significant advantages over an ex post funded system.”
The levy makes sense on a few levels, as it will act to level the playing field a bit between the biggest financial firms and the rest of industry and will ensure that taxpayers do not bear the brunt of future failures. Dodd should listen to those like Corzine, who are correctly characterizing this proposal as a common sense reform that doesn’t place much of a real burden on the firms it will affect.