Is it time to soak the rich in America? There are those who fondly wish that the United States would start taxing its bankers' bonuses at 50 percent, following the United Kingdom's decision last week. Too bad it will never happen.
It's certainly more appealing than adopting other British things, like Marmite. And a one-year "windfall" tax on bankers obviously seems attractive for America. After all, we have the anger"”try saying "Goldman Sachs" in polite company these days"”and the need. The U.S. budget ran into a $1.4 trillion shortfall in fiscal 2009 with a $9 trillion deficit looming in just a decade. We won't plug that kind of hole with farcical returns like General Motors paying $50 billion to the government with the government's own TARP money.
But taxing the finance industry also won't plug the deficit hole very much. Securities industry analyst David Trone estimates that the top three banks"”Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan (JPM)"”will allocate $49.5 billion for compensation this year, with $22 billion of that coming just from Goldman Sachs. Between January and September this year, the six largest banks in America put aside $112 billion for total compensation, according to the New York State Comptroller. That includes salary plus bonuses for all employees, from the IT guys to the hotshot traders. So even if the federal government took half of all that, it would still amount to a total of $56 billion in the federal coffers.
It's a rich payday for individuals, to be sure, but not rich enough to solve the federal government's cash crunch. To put that amount in scale, it doesn't even equal 12 percent of the cost of the TARP. The government handed out $453 billion in direct bailout money. The six major banks have since paid it back"”the top three plus Citigroup, Bank of America (BAC), and Wells Fargo"”and the government has earned back only $116 billion.
At the same time, the government is only getting in deeper to some bailouts. The Federal Reserve has so enthusiastically embraced the risky loans and troubled securities from many banks that its balance sheet now stands at over $2.25 trillion"”up from $800 billion just last year. Around $1.8 trillion of the Fed's balance sheet comes from Treasury, agency, and mortgage-backed securities adopted from banks.
Meanwhile, money keeps flowing out of the government's hands. Citigroup escaped TARP only because the United States agreed to give up billions in potential tax money. Fannie Mae (FNM) and Freddie Mac (FRE) already need more than the $400 billion they already received in emergency funding. The remainder of the TARP funds went to smaller banks, some of whom collapsed entirely; three recipients failed just in November, according to ProPublica. So it's unlikely that much TARP money will bounce back, with the behemoths having returned their debts and other federal aid recipients like GM, Chrysler, and AIG (AIG) still in trouble. Of course, the government gave Citigroup alone a $345 billion bailout, including federal guarantees on risky assets. Bank of America won a bailout package in excess of $138 billion, including a $45 billion TARP handout. The guarantees the government gave to these firms"”as well as Bear Stearns and AIG"”allowed them to survive. But they are still fairly weak. And many banks and finance firms still have tons of toxic, nearly unsaleable loans lurking on their balance sheets.
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The bank bailouts are interest bearing loans made by creating more government debt. Just like a loan that a bank makes to someone, all the profits from investing the borrowed money in a house (or anything else) go to the borrower. You didn't call your re-mortgage loan from the bank a 'bailout' and you certainly didn't expect to share your eventual profits with the bank when you sold - even if not getting re-mortgaged would have meant bankrupcy. Why should loans made to banks be any different? What the borrower does with any profits they make with the borrowed money is up to them.
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