The brazenness of the financial services industry knows no bounds.
The latest sighting comes in the form of a leak (or a plant? of the fact that Securities Industry and Financial Markets Association which is considering mounting a constitutional challenge to the proposed TARP fee of 15 basis points of uninsured liabilities announced last week.
The New York Times sets forth the logic, such as it is:
Wall Street's main lobbying arm has hired a top Supreme Court litigator to study a possible legal battle against a bank tax proposed by the Obama administration, on the theory that it would be unconstitutional, according to three industry officials briefed on the matter….a bank tax might be unconstitutional because it would unfairly single out and penalize big banks.
The article does say clearly that this strategy would set large financial institutions against smaller ones, looked like a big stretch legally (constitutional law professior Lawrence Tribe was dismissive), and would further enrage a pretty cheesed off public.
So why is SIFMA giving this idea any consideration?
I have three possible answers: one is that the banksters have become so accustomed to getting everything they want that they are not prepared to be inconvenienced, and are willing to throw any and every possible roadblock to make that stance clear. A second possibility is that they see this sort of fee as establishing a precedent they do not like (more on that soon), and are therefore willing to engage in a disproportionate response to make sure it goes nowhere. The third is that this is simply Kabuki drama: the bankers are going to engage in ritual howls to convince the public that they are being treated horribly, when the fee is not that onerous and is sure to be watered down. This type of threat makes Obama look tougher than he is, and would help him solve his PR dilemma (that he has been far too accommodating to the banks, and now needs to look tough minded. So if the banks squeal, surely Obama is being hard on them, right?)
The first idea, that the banks have become habituated to getting their way, given the repeated, successful neutering of pretty much anything that looks like reform, the consumer financial services protection agency and derivatives being the showcases. One partial exception was that some of the worst credit card abuses have been curtailed. The flip side was that leaks from the bank stress tests presented the bankers as getting into regular, heated arguments with the Treasury. Back in the stone ages when I was young, no bank would dream of treating a senior regulator as an equal party, much the less getting pushy with them. So they could simply be reverting to form.
The second possibility, and this is consistent with the notion of arguing that the fee would discriminate against large banks, is that this fee would set a precedent that the banks might regard as dangerous. The fee applies only to banks with more than $50 billion in consolidated assets, and is 15 basis points of liabilities not insured by the FDIC. Now let us stress that 15 basis points is not a big charge; per the example shown (not terribly unrepresentative) it works out to 6 basis points across the entire bank.
The reason the banks may want to cut this sort of idea off early is that the Treasury allegedly has been planning for some time to make life difficult and expensive for very large financial firms. The idea is if they raise the cost of doing business for really big firms, they will be forced to become smaller to remain competitive, thus alleviating the TBTF problem. Put it this way: if McKinsey is talking about this stuff at alumni presentations (as it has been since at least last May) when McKinsey is advising the Treasury and the Fed (and the tone of the presentation is that this represented the Treasury’s plans), the plan to make it is already well known by those closer to the action.
Now this fee is hardly a big step down this road, but the view from inside the banking industry may be that any measures along these lines must be opposed.
Despite this talk of making it expensive to be TBTF coming from sources who clearly had the inside skinny, I discounted it when I heard it, simply because even as of then, the Administration had been so accommodating to the financiers I could not imagine it making such a radical change in course. And lobbyists might want to make sure absolutely no progress is made along this path.
As an aside, I’ve heard many commentators howl about the impact a move like this would have on lending, but I think they are barking up the wrong tree. Banks can borrow for nada from the Fed now and earn large spreads. If they are not lending now, it is that they see the prospective losses being high (accurate or overdone risk aversion).
I’d be curious to get feedback, but I think the bigger impact would be on the repo market. Banks and in particular broker dealers get a considerable portion of their funding through a pawn-shop like procedure in which they sell high quality instruments (originally only Treasuries) subject to an agreement to repurchase. Repos are used to raise cash that is then used as collateral (or securities that are accepted as repos are posted directly as collateral. A very big use is collateral for derivatives exposures.
Back to the main argument. The third possibility is that this is just posturing, I’m not certain how the winks and nods might have been exchanged, but the financial firms are playing along with the new “Obama is tough” posture to make him look like he has gotten a pound of flesh from them. The public will remember all the noisy protests, and won’t be paying attention when the legislation, which is not that tough, is inevitably watered down later. So Obama wins and the banks win. What’s not to like?
Obama has finally notched up his rhetoric to something that sounds serious, but given his history of bending over backwards, it will take a lot more than stern words to bring the industry to heel:
Those who oppose this fee have also had the audacity to suggest that it is somehow unfair, that because these firms have already returned what they borrowed directly, their obligation is fulfilled. But this willfully ignores the fact that the entire industry benefited not only from the bailout, but from the assistance extended to AIG and homeowners, and from the many unprecedented emergency actions taken by the Federal Reserve, the FDIC and others to prevent a financial collapse. And it ignores a far greater unfairness: sticking the American taxpayer with the bill.
Note this is the first time Obama has admitted to the banks getting tons of subsidies, much the less outlining the major types. Heretofore he has studiously avoided mentioning that, and has gone to great lengths to position the TARP as a profitable investment.
He must be getting desperate.
Update: I want to be clear that I don’t consider this measure to be well designed or thought out. This fee bears all the hallmarks of being devised quickly to create the appearance of Doing Something About Those Greedy Bankers. But what is disturbing, as James Kwak points out, is that this fee, despite the caviling, is that the funding advantage of large banks v. small has widened. It averaged 48 basis points from 2000-2007, and from 4Q 2008 to 2Q 2009, increased to 78 basis points.
Now the flip side is that measures like this, plus much greater capital requirements in general, and in particular on bigger firms, would force banks to save more of their profits and pay less in bonuses (you’d need to regulate them tightly to make sure they did not start making greater use of off-balance sheet vehicles to increase leverage). And I’d be much happier if the “TARP fee” were reconstituted as a “Yes, Virginia, We are Guaranteeing Your Liabilities Too Fee ” fee, as in insurance payments. While FDIC insurance regularly proves insufficient in a crisis, it’s better to have the industry at least paying some of its freight than none.
“He must be getting desperate.”
You think?
Take a look at Massachusetts. If such a liberal state is ready to elect a dude like Scott Brown…
Mitt Romney
I thought Obama’s speech here in MA was very telling indeed, and people here are not stupid… we have an extremely well educated populace here. Many no longer believe anything he says and his allegiances to the banksters and insurance lobbyists are very clear, and they don’t benefit MA citizens who are quite ready to vote against the perceived Establishment.
Look closer at Scott Brown (beyond the party rhetoric on either side) and you will see he’s actually a moderate Republican and that endangered beast can still win major elections here… he’s pro-choice lite and despite claiming to be against same-sex marriage he is pro civil unions (same sex marriage is already a done deal in MA). Keep in mind that 51% of MA voters and unaffiliated/independent and therefore have very little party loyalty even if they do tend to vote for one party over time. There are many independents and pissed off Dems (including most of the rank and file union folk) who are ready to vote for Brown as a big FU to the Dem Establishment and their current policies and that are not thinking along classic traditional Right-Left or Liberal-Conservative lines. After all, whoever gets elected has to run again in 2 years.
Obama and the Dems have slit their own throats with their bankster friendly actions. Everyone other than the True Believers laughs at his “fat cats” rhetoric.
Being in NY I don’t know much about either candidate, but I don’t blame people for sending a big FU to the Dems, even if only out of spite.
Agreed. Amazingly, I think the Democrats don’t see it coming. They’re still rambling on about issues from two years ago — completely unaware of the fury growing in the American electorate.
The carnage will be legendary. (And I say this as a Democrat).
I wrote about this too. I lean toward your first thought, that by now they’re psychopaths who simply can’t stop themselves. That’s almost always the theory which best fits the evidence.
http://attempter.wordpress.com/2010/01/18/bring-em-on/
OTOH I don’t think it makes sense as bankster kabuki. It’s clearly kabuki on Obama’s part
(get a load of this wimpy quote from the NYT article:
Indeed, President Obama urged the financial lobby to stand down when he introduced the tax proposal last week: "Instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities.")
but if the banks want to go along with the appeasment tactic surely it would be better not to engage in a high-profile public fight which could only highlight their incorrigibility and how corrupt the system is.
That is, if they really intend to go ahead with this. Of course it could be meant to be nothing more than grumbling upon which they won’t follow through. But given their record, anything’s possible.
I’d welcome such a lawsuit. I think the potential upside is much better from the public political education point of view.
I found it especially evocative how their theory of the case would put them in the company of Confederate secessionists. That seems profoundly appropriate given how they are in fact attempting to “secede”, to abscond with the veritable country itself.
I say give: give them all of the rope they want, and more.
Do you not think there is a closer analogy between the Robber Barons of the era immediately following the Civil War and the Banksters of today than between the Banksters and the Confederates (or Communists)? Cui bono? Just as the Robber Barons were the beneficiaries of the Civil War, the Banksters have been the beneficiaries of the financial crisis. It seems to me that our biggest problem is that the political class of both parties has come to see Banksterism as a viable career plan when they leave office. From Rahm Emmanuel to John Edwards, where does the political class go when they want to make a few (or more than a few) bucks?
Besides, the leaders of the Confederacy were not tried after the war because there was fear among their political adversaries that the Supreme Court would declare that the South had the right to secede. Robert E. Lee was so popular nationally that New England newspapers tried to draft him to run for President against Grant. The Banksters, on the contrary, are popular only inside the Beltway.
I was referring to a passage in the article which said that the plaintiff’s theory of the case, that a particular group was being singled out because it was politically unpopular, has past analogues only with regard to some laws passed to disadvantage former Confederates.
And on my own I made the analogy that just as the Confederates wanted to secede with part of the country, so these banksters really want a form of “secession” in that they want to steal the entire country while freeing themselves of any accountability to any law or civic morality.
So in that sense they’re “like” the Confederacy but far worse.
But I agree with you that in every other sense these are robber barons, and not much like the old Confederates (except in the sense of wanting slavery).
My guess is in line with Yves third option, that this response from the bankers is more Kabuki intended to make Obama look that much tougher in Massachusetts. This image as a crusading banker slayer should in theory allow Obama to leverage emotions up in order to support the corporocrat the Democrats are running in the Massachusetts Senate race. The timing of the original tax-the-bankers proposal was suspicious in that it tied in well with the plunging poll number of the Democratic corporocrat candidate. And this weekend Obama apparently has been using the opposition to his tax-the-bankers proposal expressed by the corporocrat the Republicans are running as a reason for asking people to vote for his corporocrat. For some strange reason the latest polls show the impeccable logic of his argument is just not working. It seems some people have had it with corporocrats of all stripes and are sitting out this election or just voting third party. Time will tell though, the health industry has a huge projected revenue stream guaranteed by the USG if ObamaCare passes. But I suppose with well more than 90 coporocrats sitting in the Senate, a way will be found to pass ObamaCare even if the Republican corporocrat manages to win.
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