Obama Bank-Tax Proposal Has Populist Appeal, Political Critics

Jan. 15 (Bloomberg) -- While President Barack Obama counts on the populist appeal of a plan to tax the biggest financial firms, his idea already is being buffeted by political headwinds.

Many Democrats remained silent about the plan Obama announced yesterday. Others, such as Senate Finance Committee Chairman Max Baucus of Montana, were noncommittal in their reaction. And some of Obama’s fellow Democrats expressed opposition.

“I just don’t think the financial services industry is a piggy bank that government can dip into anytime it needs to solve its budget problems,” said Representative Michael McMahon, a Democrat who represents parts of New York City.

The fee would apply to financial companies with assets of more than $50 billion. It would be based on bank liabilities and imposed starting June 30 on companies such as Citigroup Inc., American International Group Inc. and Bank of America Corp.

With congressional elections coming in November, Obama is tapping into public anger over the taxpayer bailouts of the financial and auto industries, Wall Street bonuses and the federal deficit, which rose to $1.4 trillion last year. Reports about bank profits and bonuses come as the nation’s unemployment rate remained at 10 percent last month.

It is “a mistake” and “inappropriate” to view banks as an easy political target, McMahon said.

“The public is incredibly angry at the banks and feels that the banks have made a huge amount of profits off the taxpayer rescue,” said Doug Elliott, a fellow at the Brookings Institution in Washington and a former managing director at JPMorgan Chase & Co. “Virtually every figure in Washington right now is trying to step forward and make clear they’re with the people and not the bankers.”

Passage Prospects

While there’s a good chance Obama’s proposal will pass the House, its fate in the Senate is less certain, reported FBR Capital Markets analysts led by Paul Miller.

The tax “has a very low probability of passage in the Senate, as nearly all Republicans and a sufficient number of Democrats would likely vote against the measure,” the analysts, based in Arlington, Virginia, wrote in a note to investors.

Obama said the levy, which would be imposed on as many as 50 financial firms, is aimed at getting back “every single dime” of taxpayer money that bailed out those companies during the worst recession since the 1930s.

Revenue Estimates

The administration estimates the tax will raise $90 billion over 10 years and $117 billion over 12 years. More of the plan’s details will be included in the budget message Obama sends Congress next month.

Republicans labeled Obama’s “Financial Crisis Responsibility Fee” a politically motivated proposal that, while aimed at an unpopular industry, would end up hurting most citizens.

Michael Steele, chairman of the Republican National Committee, called the fee “nothing more than another tax on the American public.”

Representative Jeb Hensarling, a Texas Republican, called the proposal “the latest folly in the Obama administration’s failed attempt to borrow, spend and tax their way into economic prosperity.”

Key Democrats, including House Speaker Nancy Pelosi of California, House Financial Services Committee Chairman Barney Frank of Massachusetts and Senate Banking Committee Chairman Chris Dodd of Connecticut, rallied behind the measure.

Cross Currents

Comments by Representative David Camp of Michigan, the top Republican on the Ways and Means Committee, reflected the cross currents surrounding the issue. Camp said he is concerned that the bank tax would hurt lending and job creation.

He also called bonuses some banks are awarding “outrageous,” and said voter anger at the institutions will be difficult to ignore.

“It’s going to be a tough bill politically to oppose,” he said.

The fee drew immediate criticism from industry. “We remain concerned that this is more evidence of the cynical view of the banking industry which prevails in Washington,” David Hendler, a banking analyst at CreditSights Inc., wrote in a research note.

Companies including JPMorgan, Citigroup, Wells Fargo & Co., Bank of America, Goldman Sachs Group Inc. and Morgan Stanley were among the biggest beneficiaries of the government’s $700 billion Troubled Asset Relief Program. All but Citigroup have repaid the money, according to a Treasury Department report released yesterday.

Holding Companies

Institutions that would be affected by the fee include bank holding companies, thrift holding companies, insured depositories, as well as some insurance companies.

Some companies that didn’t receive TARP funds would face the fee.

“The tax will penalize the firms who repaid TARP with interest and those who never even accepted it to begin with,” said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, which represents large banks.

General Motors Co. and Chrysler Group LLC, which got aid from the bailout fund, would be exempt.

Obama yesterday cautioned major banks that passing the cost to consumers would backfire.

“I’d suggest you might want to consider simply meeting your responsibilities and I’d urge you to cover the costs of the rescue not by sticking it to your shareholders or your customers or fellow citizens with the bill, but by rolling back bonuses for top earners and executives,” he said.

To contact the reporters on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net