Today, the Senate Finance Committee is holding a hearing to examine the Obama administration’s proposal to implement a bank tax on the biggest financial firms, in order to recoup any losses that result from the Troubled Asset Relief Program (TARP). The administration wants the fee to only be used to ensure that all TARP money is repaid, and then sunset.

However, there is a growing consensus that a permanent levy on the very biggest firms makes sense for a variety of reasons, including raising funds to deal with future banking crises and evening the playing field between large and small institutions. Sen. Jeff Bingaman (D-NM) pressed Treasury Secretary Tim Geithner on why the administration is not embracing that approach:

What you’ve described is a way to pay back the taxpayer for the TARP funds that would have the effect of discouraging risky behavior, but why don’t we consider both a ex-post fee, which is what you’ve proposed to recover TARP outlays, and also a so-called ex-ante levy to deter risk-taking at the expense of taxpayers going forward?…You could take the fee you’re talking about as a way to pay back the TARP funds and still add to that another fee which would go to the government so that the government would be more capable of doing whatever it had to do in the future.

Watch it:

Geithner’s argument is that the very existence of an industry-fronted pot of money will lead to moral hazard, as banks will anticipate being bailed out should they fail. I think this worry is overblown, so long as the financial reform legislation pending in the Senate makes it abundantly clear that the fund can only be used to liquidate, not perpetuate, a firm. As Rep. Luis Gutierrez (D-IL) put it, banks don’t rush towards destruction because the FDIC deposit insurance fund exists, so there’s not much reason to think that a pre-funded resolution mechanism will induce moral hazard.

Plus, we already have pre-funded mechanisms for cleaning up other national messes. In yesterday’s Progress Report, we explained that some of the economic costs of the current Gulf oil spill will be covered by the Oil Spill Liability Trust Fund, which is built up over time by a tax on oil produced in or imported to the United States. As Tim Fernholz argued, the same principle should be in effect for cleaning up after financial disasters, to ensure that banks are “paying their fair share of the bill.”

David Leonhardt wrote in the New York Times last week that “a bank tax is akin to an insurance policy that taxpayers would require Wall Street to hold. The premiums on that policy would keep Wall Street from making big profits in good times while foisting its losses on society in bad.” It would be nice if the administration would at least consider the economic case for making the tax permanent, instead of relying on a moral hazard argument that seems pretty thin.

Today, the Senate will begin to vote on amendments to Sen. Chris Dodd’s (D-CT) financial regulatory reform bill. According to a piece in the Washington Post, many (conveniently unnamed) lobbyists for the financial services industry are dismayed by the strength of the legislation. The lobbyists used phrases such as “draconian,” “crazy,” and “insanely unproductive” to describe the bill.

In anticipation of the amendment debate, during which many attempts will surely be made to blow holes in the legislation by lawmakers sympathetic to the banks’ concerns, White House Communications Director Dan Pfeiffer laid out the 10 most wanted lobbyist loopholes. There are some obvious ones on the list — like weakening the bill’s consumer protection provisions — but also some that are garnering fewer headlines.

For instance, number nine on the list is “Letting Firms Make Loans Without Skin in the Game.” And lo and behold, according to Congressional Quarterly, banks are approaching Sen. Bob Corker (R-TN) and other lawmakers to try and talk them into advocating this change:

Lenders are pressing Tennessee Republican Bob Corker and other lawmakers to file an amendment that would strike a provision in the current legislation requiring banks to hold on to at least 5 percent of a mortgage before slicing the rest of the loan into pieces and selling it into the securitization markets.

This provision — known as risk-retention — is an important part of the bill, and addresses a key problem that contributed to the country’s economic meltdown, which was the ability for subprime lenders to securitize and sell off an entire loan, divorcing themselves from the risk of mortgage default.

As the Center for Public Integrity has pointed out, during the subprime bubble “lenders were selling their loans to Wall Street, so they wouldn’t be left holding the deed in the event of a foreclosure.” This fueled a dramatic decline in lending standards. Dodd’s bill would require that lenders retain 5 percent of every loan on their books so that they are not completely separated from default risk.

The Wall Street Journal yesterday provided a good example of the damage this sort of securitization can cause, as one bad bond ends up infecting all sorts of assets:

In one case, a $38 million subprime-mortgage bond created in June 2006 ended up in more than 30 debt pools and ultimately caused roughly $280 million in losses to investors by the time the bond’s principal was wiped out in 2008.

“If I lend you money and I expect to be paid back, I’m going to be more careful than if I lend you money and you’re going to pay back somebody else. And securitization has weakened that borrower/lender relationship and the discipline,” explained Rep. Barney Frank (D-MA), who has pushed for 10 percent risk-retention. If Corker does indeed propose an amendment striking risk-retention from the bill, the Senate should be sure to vote it down.