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Bank bashing has always been an easy sport for demagogues, ideological rogues and politicians. It gives the bashers a sense of achievement and superiority without having to even be aware of -- let alone acknowledge -- the collateral damage they are inflicting on the innocent and on the general economy. President Barack Obama stepped up to the plate yesterday, took three rhetorical swings at the banking industry, and marched briskly off the field, not realizing he had struck out.
In announcing his "intention to propose" a new tax on America's banks that would raise $117-billion over 12 years, Mr. Obama portrayed the move as an attack on "massive profits and obscene bonuses" at banks that have received federal bailout money. "We want our money back, and we're going to get it." Called the Financial Crisis Responsibility Fee, the tax looks like a good clean populist swing at bankers. What it really is is a strike against U.S. economic recovery prospects.
As Mr. Obama issued his proposal in Washington, Canadian bank CEOs were simultaneously in Toronto explaining why regulatory confusion and looming uncertainties make Canadian bank acquisitions in the United States unlikely. What the U.S. banking industry needs more than anything right now is regulatory stability and an environment that will attract more capital and generate mergers and acquisitions.
The new tax, which may also hit directly at Canadian banks that are already in the United States, merely adds another 117 billion reasons to hold off making any new investment in the U.S. financial sector. The tax, moreover, will do nothing to help the banks recover. While the money isn't a huge sum compared with total bank assets, it is $117-billion that will not be available to re-capitalize the existing banks and provide the foundation for more lending to businesses and consumers.
A Canadian bank analyst estimated the Obama bank tax could hit Toronto-Dominion Bank for $120-million a year, or $1-billion over 10 years. Small change in bank circles, but punitive and discriminatory nonetheless -- especially since TD had nothing to do with the U.S. financial meltdown. Large U.S. banks such as Bank of America face a new tax of $1.5-billion a year.
Contrary to Mr. Obama's rhetoric, the new tax is not about bank bonuses -- they will still be paid. When taxes are imposed on banks, the burden falls on bank shareholders and, ultimately, customers. After the United Kingdom announced a one-time 50% bonus tax on money paid to their employees, a Financial Times survey found that most investment banks plan to absorb all or part of the cost of the tax, or find some other way around it. The majority said they will inflate their bonus pools to counter the tax. U.S. firms reported they are more likely to simply absorb the cost of the tax. All of which means that the British bonus tax on banks will simply reduce profits and erode the ability of the banks to do what they desperately need to do, which is increase their capital bases.
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