The Financial Crisis Responsibility Fee is an irresponsible proposal, in my view. While bonus jockeying by TARP babies disgusts me, two wrongs do not make a right. I propose the Administration instead seek to reform the process of determination of executive compensation, since it is paradoxical that Americans view it grossly excessive, and yet shareholders agree to it.
Financial Crisis Responsibility Fee
Two weeks ago, the President proposed his Financial Crisis Responsibility Fee, a tax on the 50 largest financial companies. The proposed fee has been engineered to recover funds provided to the firms, issued to ensure their survival through the financial crisis, and to save the country's financial system as well. There are various possibilities for the reasoning behind the Administration's seeking to impose this fee now.
The President may simply intend what he states, to ensure that those who benefited from the TARP payouts meet their obligations. The benefit to him and his party is clear, as he would demonstrate to the American people that greedy executives will not pay themselves big bonuses at the cost of the American taxpayer. Rather, in this case, the shareholders of the firms in question will continue to rightly to bear their cost.
As with any political issue, the exploration of other possibilities cannot be avoided. As the Treasury Budget deficit expands due to stimulus and other government spending that is matched against slimmer government receipts, the President is under intensifying pressure to find money. Tapping into popular sentiment that stands against Wall Street offers an easy route toward those funds, especially as these firms issue their annual bonus payouts. However, the taxpayer is only owed $117 billion by "conservative estimates," with fund flows spread out over a period of 12 years; so we are not talking about a significant annual inflow. Perhaps every little bit counts though... Finally, there is a possibility that the Administration only seeks to better position itself for political jockeying purposes.
While I understand the President's ire toward irresponsible and selfish executives at work on Wall Street, I disagree with his Administration's response. The American President pushed the tenets of capitalism aside, by proposing a new special levy on what appears an unscientifically identified group of financial organizations. Fifty of the nation's largest banks have been targeted, supposedly in order to drive home a lesson, that excessive risk taking does not pay. The action seems to me a naive and sloppy hacking for the sake of a misguided sense of righteousness, or perhaps yet another politically motivated perversion of the American way.
Democrats have come under a lot of pressure of late, and might benefit from championing this Main Street cause. Since both the recession and TARP were Bush's babies, it makes sense to form a corrective political strategy. Even if Obama's inspiration is not political, I doubt his party's political positioning advisers are talking him out of it. I am not so sure about the economic crew though, because this stinks of mafia state.
Politically speaking, with the loss of the Senate seat in Massachusetts, the Administration will have difficulty getting the Democratic Party agenda accomplished. Playing hardball on issues like this one might simply give the Democrats the bargaining chips they need to pass legislation like health care reform.
Still, I am almost apologetic for my words, because I am far from favoring the excesses and criminal-like, selfish activity I see at the TARP and other government saved firms. The bonus jockeying that occurred on Wall Street last fall disgusts me. Several bank corporate executives determined their firms should sell new shares of stock in order to raise capital, so that they might repay TARP loans early.
Before you pat them on the back for their great sense of responsibility to the government, let us examine their incentive and who bore the real cost. The reason existing shareholders' stakes were diluted by these hurried equity offerings could be attributed to corporate executives' intent to once again collect the bonuses they had grown accustomed to over the years. You see, just before these slick maneuvers occurred, the government decided no TARP baby could pay bonuses to their executives. So, the entire nursery made a break for it.
I think you can see why I am not in perfect opposition to the President in this case, but I will explain now why I disagree with this method of engagement. Free market capitalism works best when the game is played fairly. When one team cheats, it does not improve the game if the other does as well. In other words, two wrongs do not make a right. We should not impose surprise taxes on the shareholders of these firms. What we should have done is taken equity stakes in the firms, enough to ensure bonuses would not be paid out. Casting a broad net is unfairly catching goldfish along with the sharks. Firms have been discriminately selected based on their size alone, and some of these organizations were forced to take part in TARP while others did not have as dirty hands as those we seek to punish.
Maybe though, it takes some naivete' to get great things done, and perhaps this is just the cost we bear for it. It is possible that shareholders might punish their corporate leadership and improve corporate governance as a result of this bill, should it pass into law. What our government should really be seeking to do, is to change the way corporate executive compensation is determined. If Americans disagree with the amount of compensation executives make, than the system of determination must be flawed. Otherwise, why do the shareholders of these firms, which are inclusive of Americans, continue to elect and agree to such payments?
The destructive effect of this Presidential proposal is to raise uncertainty around this government. In the eyes of the investment community, it is now unpredictable. Investors and corporate America will worry that the government makes rules up as it goes along, and therefore cannot be trusted. The stock market is a great judge of value, and though it was slow to catch on to the agenda this time, as the President announced another action this week to go along with his new tax, stocks rediscovered volatility. I am sure the Administration does not seek to do more harm than good, but this action is poised to, in my view.
"It is also in reality the integrity of our government and financial markets that we place in peril."
Political will has shown itself to be soft through this economic crisis, and so I anticipate our elected leaders will cave like jellyfish to populist sentiment that stands strongly against the proverbial “Wall Street;” though it is in reality 50 big banks we speak of. It is also in reality the integrity of our government and financial markets that we place in peril.
Bloomberg took a survey of its subscribers that showed 77% of investors and analysts view the President as anti-business, which may perhaps be a side effect the Democrats had not anticipated. Still, investors and analysts do not comprise the entirety of the nation, as 52% of Americans said Obama struck the right balance.
The idealist in me doubts a bill like this could pass through Congress, but the realist, who knows what short length political will extends, worries it might. The only hope for honest capitalism to remain unmolested now is if the Democrats only seek to use this initiative as a bargaining chip, to be traded later for another legislative gain. We must not allow this proposal to become law, not for the sake of "responsibility," but for the sake of the integrity of our capitalism.
Disclosure: No positions