I don’t get it. I thought Treasury Secretary Tim Geithner said the gub’ment (Michigan Militia accent, please) would earn—as in profit—from its TARP loans about $20 billion. So why all this nonsense about punitively taxing bankers’ bonuses and massive new taxes on big financial institutions to recoup taxpayer bailouts?
As you read in the papers, the president’s spokestrons said they expect to “recover” at least $90bn over 10 years from the 50 biggest institutions. Yep, that populism must play well on the hustings, but it won’t work. Higher taxes mean higher costs; clients of the financial institutions will simply pay more, including borrowers. Institutions will try to avoid paying. This morning, Brad Hintz, a financial institutions analyst at Bernstein, said in a note this morning, that, “Prima facie, [it’s] an onerous tax.”
Hintz, who once, years ago, worked as the CFO for Lehman Bros., wrote this morning, “Treasury’s proposed 15 bps liability tax assessment implies Goldman and Morgan Stanley’s will each be foced to pay about $1 - $1.2 billion each year over the 10 – 12 years. We argue fifteen basis points is a relatively onerous fee for the capital markets banks and particularly burdensome on theses firms’ short-term funding.” [emphasis original]
He says the tax would “strongly motivate” primary dealers of US securities to “reduce financing” for their clients in the government securities market. Further, the costs would be passed on, he says, partially to hedge fun clients in higher loan rats.
And here is where it gets interesting. “But investment banks are creative,” Hintz writes. “Bernstein expects the brokers to attempt to reposition their balance sheets and pursue other strategies to reduce the impact of the tax. Based on an analysis of Q3 balance sheets, we believe MS and GS can offset about 30 percent of the tax. Also, there is some indication the tax may be regressive; if true, the charge to the largest banks (including GS and MS) could be less than 15 basis points.”