The Bank Tax and the Bay State

The Bank Tax and the Bay State

January 18, 2010
Originally published in National Review Online

As the race for the late Ted Kennedy’s seat goes into the home stretch, financial-services policy has suddenly emerged as a top issue in a special election contest previously dominated by health care. In an attempt to bolster the campaign of Martha Coakley, Democrats from Vice President Joe Biden to Democratic National Committee chairman Tim Kaine have seized on Republican candidate Scott Brown’s opposition to the tax on large financial firms that President Obama proposed on Thursday. And when the president spoke on Coakley’s behalf yesterday at Boston’s Northeastern University, he highlighted Brown’s disagreement on this issue.

“He decided to park his truck on Wall Street,” Obama exclaimed at the rally. Obama and his supporters are taking this opportunity to cast backers of the tax as populists and detractors as sympathizers of Wall Street. Biden, for instance, asserted in an e-mail reported by Politico that the tax benefits “working families in Massachusetts” and only hurts “the bankers on Wall Street who helped lead us into the mess we’re in.”

Yet Obama’s so-called Financial Crisis Responsibility Fee would hit not just Wall Street, but also some prominent financial firms in Massachusetts, potentially affecting thousands of jobs for “working families” in the Bay State. And some of the Massachusetts financial firms it could hit — including large private employers such as State Street Corp., Fidelity Investments, and the Liberty Mutual and MassMutual insurance groups — either have paid back bailout money to the federal government in full and with interest or never took money in the first place.

“We want our money back,” Obama proclaimed Thursday, referring to the projected $117 billion shortfall in the Troubled Assets Relief Program (TARP). But the irony is that the tax would mostly hit the firms that have already paid the government back, while exempting the firms that still owe the government billions upon billions: Fannie Mae, Freddie Mac, General Motors, and Chrysler.

Boston superbank and money manager State Street Corp. — one of the Bay State’s ten largest private employers — will definitely be hit by the tax, even though it was one of the first banks to pay back the TARP money this summer and never asked for it in the first place. State Street was one of nine banks to be summoned in the fall of 2008 by Bush administration Treasury secretary Henry Paulson and given an offer they “couldn’t refuse” (as various published accounts have documented, Paulson did not give the bankers a real choice) of an infusion of funds in return for the government’s taking ownership of a sizable chuck of the companies. The Boston Globe cited both the firm’s CEO and an independent banking analyst as saying that “State Street was not in any need of the government infusion of capital.” It had limited subprime exposure, and although its profits did fall, it never had an unprofitable quarter during the crisis. It is not exactly one of the firms that “helped lead us into the mess we’re in.”

The Obama administration has tried to make light of the tax, noting that it would be only a 0.15 percent levy on a firm’s “covered liabilities.” But according to an estimate in the New York Times, the annual fee for State Street alone would be a whopping $199 million a year. For the four largest financial firms — Citigroup, JPMorgan Chase, Bank of America, and Goldman Sachs — the levy would be more than $1 billion a year. Given that a 5-1 loan-to-asset ratio is considered financially conservative lending, this tax would likely translate into more than $1 billion a year that State Street would not be able to make available, and $20 billion a year that the four largest banks would be unable to provide, as credit to individuals and businesses.

But in Massachusetts and elsewhere, the Obama tax doesn’t stop with State Street or even with bailed out banks. As the Associated Press reported, the Obama tax would also “include many institutions that accepted no money from the $700 billion financial industry bailout.” In fact, the institution doesn’t even have to be a bank to be assessed this “crisis responsibility fee.”

It should be said that a bill has not yet been introduced in Congress, and it’s always possible that if this tax does pass Congress — which is far from a foregone conclusion — it will be more limited than what the Obama administration is proposing. As of now, however, a “fact sheet” from the White House states that the “fee would cover banks and thrifts, insurance and other companies that own insured depository institutions, and broker-dealers” (emphasis added). It just so happens that Boston has long been known as a hub of America’s mutual-fund industry, and some of the fund-management companies there are also broker-dealers likely to be hit by the proposed tax.

Take Boston-based Fidelity Investments. One of the largest mutual-fund groups and discount brokerage firms, Fidelity has weathered the storm relatively well and has not taken any TARP money. But since it has assets of more than $1 trillion under management, Fidelity would still likely be hit by the Obama tax, which would apply to financial firms with more than $50 billion in “consolidated assets.” So Fidelity, which employs 11,500 people in the Bay State, could be stuck with an additional federal tax bill of $1 billion.

Boston-based Eaton Vance Corp., which offers investment-management and brokerage services, is another non-TARP recipient that could be hit by the Obama tax, since it has $163 billion in assets under management. Eaton Vance employs about 700 workers in Massachusetts, and was recently listed at #43 in the Boston Globe’s 100 “Top Places to Work.”

Then there are the Massachusetts-based insurance-holding companies Liberty Mutual Group and MassMutual Financial Group, which employ thousands in the state. These firms also did not take a dime of TARP money, but they would likely be subject to the tax because their assets far exceed the $50 billion threshold. The White House fact sheet does say that “the base for the fee would be appropriately reduced based on insurance policy reserves” for policies subject to state guarantee funds in the event of failure. But the fee would still be a significant cost for insurers and policyholders who had nothing to do with the financial-sector implosion.

“Virtually every examination of what caused the financial meltdown in 2008 has shown that property/casualty insurance played little or no significant role in the crisis,” the National Association of Mutual Insurance Companies said in a statement. “By asking insurers to pay this fee, President Obama is asking those who acted responsibly to pay for the Wall Street firms that gambled with their customers’ money and lost.”

In addition to the jobs that would be affected, the Obama tax could lead to higher fees and premiums, lower stock and insurance-company dividends, and less credit available to form new businesses. As noted financial-services analyst Meredith Whitney told the New York Times, “To think that it won’t come out of consumers and businesses is mistaken.”