Published: January 15 2010 20:35 | Last updated: January 15 2010 20:35
The American public dreams of putting bankers on trial. The hearings of the Financial Crisis Inquiry Commission, which started this week, are a spectacle that comes close to that fantasy. With camera flashes firing, the bankers’ journeys to take the stand have had the drama of the “perp walk”. The quasi-defendants were quizzed, among other things, on the White House’s new plan, revealed this week, for a $90bn tax on banks.
The proposal is political. That much is clear from the timing. The administration announced it ahead of bank bonus season. With US unemployment continuing to rise, the spectacle of Wall Street plutocrats reporting multimillion dollar earnings from bailed-out companies will trigger geysers of rage. This policy should soothe and exploit that popular anger.
EDITOR’S CHOICE
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Lex: Obama’s levy - Jan-14
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FT Alphaville: From Obama to Europe, with love - Jan-15
But this is not mindless populism. Crisis interventions made US bank creditors and shareholders hundreds of billions of dollars richer. But, for its part, the commonweal is expected to lose $47bn on its initial $125bn equity injection into the banks alone. The American state has a right to correct that imbalance.
The details of the proposal will necessarily be a cause of argument. The White House has settled on using the levy to pay for losses on the troubled asset relief programme. But the reasoning for targeting this amount of money is muddled. Some Tarp losses are nothing to do with the banks, notably expected losses from the car industry bail-outs. And some financial sector costs are excluded, particularly the price of insurance policies that were put in place, and acknowledged in banks’ funding costs, but never called upon. A further complication to the levy is that customers will probably end up paying it.
There is much for reasonable people to disagree on here – and even more for politicians to dispute. But the levy is justified, and it will force the banks to cover the cost they have imposed on society. This tax will draw in cash from banks backed by foreign governments. But other states should follow suit, as Tim Geithner, the US Treasury secretary, has said.
Debate about the levy, however, must not distract from the question of how to construct a financial system where banks can fail safely. In future, it must be easier for bank debt to be turned into common equity in a crisis, and the fate of insolvent banks’ counter-parties must be made clearer to prevent the panic that followed the Lehman bankruptcy. Capital requirements must also be raised.
For cases when regulators fear a bank may be too big to fail, the authorities should work out a model for ex ante insurance premiums, payable to the state. Such a structure, combined with extra-high capital requirements for these overgrown institutions, should create strong incentives for these companies to slim down. It should, in addition, make sure that they cannot profit from the public guarantees that their bloatedness brings them. States must not continue acting as omniline insurers, guaranteeing everything for free.
Copyright The Financial Times Limited 2010.
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