Financial Crisis Responsibility Fee

Today President Obama proposed that a Financial Crisis Responsibility Fee be imposed on the debt of the largest financial firms that were stabilized by the injection of public money under the TARP program. Most of these firms owe their very survival to the actions of government.

It looks like this proposal was included in the Administration’s budget which is set to be unveiled in early February but the White House decided to announce it now just as the banks and are announcing their end of the year compensation bonuses. For many Americans that have been hit hard by the recession, these bonuses are going to seem outlandish. But as the surviving financial firms returned to profitability last year, the executives appear very comfortable returning to 2007 pay levels. I suspect the rest of the country doesn’t feel the same way. Listening to the testimony of Goldman Sachs Chief Executive Lloyd Blankfein, these guys are about to make tone deafness a crime.

The fee will be in place at least 10 years and it is designed to recoup all of the TARP funds, which was already required by law but not scheduled to kick in until 2012. Community banks and small firms are exempt and the White House estimates that 60% of the revenue will come from the 10 largest financial firms. Barney Frank, Chair of the House Financial Services Committee, released a statement heralding the move. “President Obama’s action today complies fully with the taxpayer protection language of the original TARP bill. His decision to do this before 2013 is a good one because there is no need to wait. In fact, the TARP program has been both more successful and less expensive than many critics feared and that allows us to move quickly now to repay the American taxpayer.

Here is how the fee would work:

• Fee Assessed at Approximately 15 Basis Points (0.15 Percent) of Covered Liabilities Per Year

• Covered Liabilities would be equal to assets minus Tier I capital minus FDIC assessed deposits (and/or insurance policy reserves, as appropriate).

The fee will exempt FDIC-assessed deposits because they are stable sources of funding covered by deposit insurance and already subject to assessment. Covered liabilities would be reported by regulators and the fee would be collected by the IRS. Revenues would be contributed to the general fund.

Example for Bank X

Bank X has $1 trillion in assets, $100 billion in tier I capital, and $500 billion in assessed deposits. Fee is equal to 15 basis points on their covered liabilities.

$1 trillion in assets minus $100 billion in tier 1 capital minus $500 billion in assessed deposits equals $400 billion in covered liabilites times 15% fee equals $600 million in total fee paid.