BLOG VIEW: Last week, Treasury Secretary Timothy Geithner was back on Capitol Hill with yet another display of what appears to be an improvisational approach by the federal government to addressing the economic crisis. This time, Geithner was pushing the notion of a new tax on big banks that is supposed to reap in $90 billion over the next decade.
At a time when the financial services industry has been battered and bruised – both by self-inflicted wounds and by circumstances far beyond its control – the last thing required to speed recovery would be another tax. Yet Geithner's logic in promoting this tax before the Senate Finance Committee suggests a grasping-at-straws approach to the problem.
‘The fee is designed to limit the risk of any adverse impact on lending,’ Geithner said, conspicuously avoiding that T-word in regard to the proposal. ‘The fee excludes over 99 percent of U.S. banks, which currently provide the majority of small loans to businesses and farms across the country.’
Geithner insisted that the new tax would only apply to about 1% of the nation's banks, but his usage of ‘small loans’ is crucial. Geithner doesn't mention that the big banks being taxed actually provide far more than 1% of the nation's medium- and large-size business-related loans. Even worse, there was no acknowledgment that these lenders also control the residential and commercial real estate loan markets.
Yet Geithner insists that the big banks will take this bitter medicine and learn to like it. ‘If covered firms try to pass on the costs of the fee to their borrowers,’ he continued, ‘they will lose market share to other institutions. The Congressional Budget Office (CBO), in its review of our proposal, highlighted these advantages by noting that the proposal 'would improve the competitive position of small- and medium-sized banks, probably leading to some increase in their share of the loan market.'’
This statement cannot be taken seriously. The big banks are going to have to find some source of revenue to cover this new huge tax, and the only likely target for this is going to be their customers. One can expect either new fees associated with loans or, in the worst case scenario, a reduction in the quantity of loan volume.
As for the CBO's observation, the small- and medium-sized banks are now experiencing a new set of problems as the commercial real estate market falls into further disrepair. These institutions will not have the financial wherewithal to magically swoop in and snatch away borrowers from their larger rivals – really, who's kidding whom?
The financial services industry is already waving red flags on this proposal. Steve Bartlett, president and CEO of the Financial Service Roundtable, publicly questioned Geithner's proposal by stating the new tax could actually reduce the level of lending by up to $900 billion. James Chessen, chief economist for the American Bankers Association, predicts that the tax find its way beyond a finite number of supersized banks into the wider industry – and that's more than likely, when you consider the administration's aggressive efforts to overhaul the regulation of the entire banking industry rather than focus exclusively on the relatively few too-big-to-fail institutions that triggered the crisis.
It is more than possible that this tax could be ramrodded through Congress. After all, there is little public sympathy for the larger companies of the financial services industry, and any congressional attempts to question this tax would make the elected officials look like they are more interested in Wall Street than Main Street – which is not the best perception to cultivate in an election.
Hopefully, the industry will make a vigorous attempt to shine a light on this terrible idea and stop it in its tracks. The economic recovery has been lethargic, and there is a fairly good chance that it will stall, or even reverse itself, as the year progresses. The worst way to help bring the financial services industry back to good health is to burden it with a nonsensical and damaging new tax.
– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]
[i] (Please address all comments regarding this opinion column to hallp@sme-online.com.)[/i]
