"The cost of the crisis may be in the range of $100 million."


The proposed "Financial Crisis Responsibility Fee" has problems of constitutionality, economics and basic arithmetic. And the fee—a tax on bank debt with at least a 10-year life span—will accomplish nothing that wouldn't be done more easily by simply retiring the Troubled Asset Relief Program.

Here's how the Treasury Department does the numbers:

While the Administration projected a cost of $341 billion as recently as August, it now estimates, under very conservative assumptions, that the cost will be $117 billion–reflecting the $224 billion reduction in the expected cost to the deficit. The proposed fee is expected to raise $117 billion over about 12 years, and $90 billion over the next 10 years.

The 15-basis-point fee on covered liabilities (assets minus Tier 1 capital minus FDIC-assessed deposits) will be applied on large financial firms even if they have paid back their TARP funds. When we refer to bank debt as "covered," doesn't that presume the TARP has created some kind of permanent insurance policy for financial institutions? Is the executive branch authorized to make such a determination? The Emergency Economic Stabilization Act of 2008 required the TARP to be reauthorized last month (Breathe easy; it was), and TARP technically only exists through October. So how can it be a basis for legislating a 10-year tax?

In his December 9 reauthorization request to House Speaker Nancy Pelosi (D-California), Treasury Secretary Tim Geithner made clear that TARP's goal in 2010 would be to encourage Americans to take on more consumer and real estate debt through "small and community banks," efforts to "mitigate foreclosure" and the Term Asset-Backed Securities Loan Facility. In that sense the proposed tax is kind of a reverse Ponzi scheme, which will try to take from the upper-level participants to pay out participants at the lower level. But if this "financial system" works the way they say it does, shouldn't that mean we need to encourage the upper tiers to go deeper into debt, so there will be more debt for everybody down the slope? 

One MILLION Dollars!

Coverage of the responsibility tax and the billions it will extract from cuddly audience favorites Goldman Sachs and JPMorgan Chase also helps Geithner's larger project: the war on math. Here Geithner explains to CNBC that the "ultimate costs of solving this financial crisis" will be in the $100 million range. So America has lost $12 trillion but the government will make us pretty close to whole with an expenditure of $100 million. Never doubt the power of the multiplier.

But let's assume that figure is correct. Doesn't that mean Treasury can start calling in all the TARP debts and winding down the TARP itself? If we end up losing only $100 million that will be money well spent to….eh, will it wasn't well spent to save the financial system but it did help calm down a bunch of middle-aged male hysterics in 2008, and middle-aged male hysterics do need our support.

Another point hammered home in Treasury's Responsibility Fee fact sheet is that the penalty will apply only to those who are too big to fail:

Apply to the Largest and Most Highly Levered Firms: The fee the President is proposing would be levied on the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms. By levying a fee on the liabilities of the largest firms – excluding FDIC-assessed deposits and insurance policy reserves, as appropriate – the Financial Crisis Responsibility Fee will place its heaviest burden on the largest firms that have taken on the most debt.  Over sixty percent of revenues will most likely be paid by the 10 largest financial institutions.

First question: Who's the fuddyduddy on the Treasury copydesk who made the "We can't use leveraged as an adjective" call? That's a Profile In Courage.

Second question: Would you still need the deterrent to leverage if you got rid of all the incentives for leverage in the tax code? (We're not even talking about different departments here.)

Third question: Would you still need to put the too big to fail banks on this debt diet if they knew they'd be allowed to fail? You know, like the president says: Let them know they can't keep going deeper in the hole and "expect that next time, American taxpayers will be there to break their fall."

NEXT: Sweet Economy Alabama

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  1. Sounds like a scam to me.

  2. I think we can retire the comment thread. There’s really nothing to add to Pro L at this point.

    1. You might as well retire me. That statement works for just about everything going on in government these days.

      1. Anonymity bot agrees.

  3. Damned fine post Tim (title could use work). Those are three excellent questions. Wish somebody was asking them in Congress. More, I wish there were more Congress Critters sufficiently unstupid enough to get the right answers.

  4. Boy, I need to get a job thinking up bizarre taxes with arcane formulae. It looks like fun.

    1. Step one: Max out your contributions to the Obama Re-Election Campaign Fund.

  5. Can anyone, even well-meaning Democrats, continue to plead ignorance of this administration’s true political objective? Americans aren’t leftists. We’ll see whether buyer’s remorse–in the handy microcosm of the Massachusetts election–is truly settling in.

  6. Would you still need the deterrent to leverage if you got rid of all the incentives for leverage in the tax code?

    You’re a funny guy.

  7. I forget; was it Jamie Dimon or John Mack who said, “We can’t be trusted not to do stupid, self-destructive shit, so please regulate the shit out of us.”?

  8. Profile in courage indeed. That man deserves significant commendations for his grammatical excellence, and significant floggings for the very fact that he works in Treasury.

  9. You neglected to mention that $45 billion of that unrecovorable money was the bailouts to the auto industry.

    I think AIG is in there as well, but that might be a separate bailout.

    1. Err, Hazel, I believe that’s closer to $80 billion.

      1. Hmm. Okay, I assume that includes GMAC and other lesser bailouts for the auto parts industry. Maybe cash-for-clunkers as well.

        I guess the $45 billion is just GM and Chrysler directly.

  10. Also, thats $100 BILLION, not million.

  11. I saw a snippet (on CNBC) of an interview, this morning, in which Timmay was incensed by the invidious insinuations making the rounds that he was acting in the best interests of evil fat cat Wall Street bankers by commanding allowing AIG to pay off their bets at face value.

  12. Why don’t some of these intreptid journalists ask Timmy the tax-cheat why this tax DOESN’t apply to GM, Chrysler Fannie Mae and Freddie Mac?

  13. Hazel-

    We are TOTALLY gonna get the money back, once the VOLT hits the showrooms.

    What are you, some kind of glass-half-empty America-hater?

    1. Yeah, GM’s stock is really going to skyrocket by a factor of 200 when that happens. Then we might break even.

      1. Absent some massive breakthrough in battery technology and a huge buildout of our electrical infrastructure, all-electric cars will never be anyone’s only vehicle.

        And because hardly anyone can afford to pay top bucks for a compact car that they will use off and on for commuting in addition to their real car, all-electric cars will never have any real market share.

        This ain’t rocket surgery, folks.

        Although the Volt, as a key element of the PR campaign that brought tens of billions of dollars to GM, is probably their most profitable car ever, without having sold a single unit.

    2. “We are TOTALLY gonna get the money back, once the VOLT hits the showrooms.”

      Does each one come equipped witha 100 mile long extension cord?

      1. Data show that the average American drives less than 40 miles per day (except when they need to drive more than 40 miles per day)

        1. Yes, but most people want the option of going on a long car trip occasionally. They don’t want to be stuck in the city all the time, or forced to take the bus or fly to leave town.

          Albeing if you live in a multi-car houshold, it might be worthwhile to have one that’s electric, and use the other one for road trips.

          1. No, you don’t get it. If you want to be TRULY green, then you should buy one car for short daily trips and ANOTHER for long trips.

            Or better yet, if you want to reach al-Gore like status you could put an Obama sticker on your Private Jet!

        2. I drive more than 40 miles every work day.

          Plus I do not want any car that is not 100% ready to go at all times – even if I have another car.

          The other one could break down and I’d need to use it as a backup.

          I will never by a battery driven only vehicle for those reasons.

      2. “””Does each one come equipped witha 100 mile long extension cord?”””

        It does, but the down side is it doesn’t auto-retract. 😉

        1. Great! That will increase employment as we create a new class of professional cord-winders.

    3. I want a car powered solely by urine.

  14. Step one: Max out your contributions to the Obama Re-Election Campaign Fund.

    In order to do that, I would need some kind of a fat consulting gig…

  15. Also, I should point out that Fannie Mae and Freddie Mac (and the Federal Reserve!) are both going deeper into the hole buying toxic assets off the banks balance sheets, which nobody is paying attention to.

    So, really, are the banks paying back the bailouts, or are they just getting bailed out from other sources?

    I think they’re collecting government money through other lines and paying back the executive-compensation-limiting TARP funds.

  16. Does each one come equipped witha 100 mile long extension cord?

    Don’t be ridiculous. Each car comes with its very own (gasoline powered) electrical substation. What an easy and elegant solution!

  17. So–do 30yr mortgages show as debt on the banks balance sheet?

  18. Greg Mankiw, that ignorant, lying hippie, that neo-Krugman, thinks the bank tax could work.

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