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.