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Wow, this switch between the bank tax and putting the burden on taxpayers is even more cynical than I thought. Daniel Indiviglio has this:

Initially, they sought to impose a $19 billion tax on big banks and hedge funds. Now, that cost will mostly be paid for with unspent bank bailout funds and a few billion dollars obtained through bigger bank assessments by the FDIC. In other words, taxpayers will bear the cost.

Conference reconvened due to the protests from centrists Republicans in the Senate who didn’t like the idea of taxing the big banks and hedge funds. Instead, taxpayers will pay for the regulation, since any TARP money unspent was supposed to go towards paying down the deficit. Those billions of dollars that would have been wiped out of the deficit will now have to come from the American people. Any money from higher bank assessments will ultimately cost consumers too, since banks will just pass on the expense to them through higher fees…

If these Republicans were really concerned about a tax, then they should have demanded spending cuts to fill the gap or scaled back some of the expensive regulation that the bill calls for. The only ones who benefit from this change are big banks and hedge funds. Taxpayers and community banks are indisputably worse off.

How can anyone say with a straight face that centrist Republicans are serious about deficit reduction? Taxpayers will now pay as a favor to keep hedge funds and investment banks without a deposit base from having to pay anything.

John Carney made it sound like a bizarre, politicized routine but in practice it would have looked much like Obama Administration “Financial Crisis Responsibility Fee” proposal. If the largest firms tried to pass cost onto consumers consumers would have downshifted into smaller banks. And in practice, the largest firms would have shifted costs they didn’t come out of bonuses onto capital markets, where this belongs. And we want the biggest and most risky firms to take a bit of a pinch in a fee, so that firms on the margin of becoming systemically risky aren’t urged to take the plunge.

Also in the unlikely scenario that every single dollar of the bank tax was passed onto taxpayers they wouldn’t have noticed. Literally, they could not have noticed as the percentage would have been lower than the number that is quoted to consumers. This is important to keep in mind for other future bank taxes.

Raj Date has a short paper on the Bank Tax, Intended Consequences, The Short Life and Death of the “Bank Tax”, with this summary and this chart:

The bank tax actually would have had negligible customer impact. Lost in todayʼs hurried debate was the absence of any empirical backing for the criticsʼ argument. Indeed, two factors would have likely combined to render the impact on customer pricing trivial.

- First, only large banks would have been subject to the tax, so efforts to raise large-bank customer pricing, in many product markets, would have simply caused a market share shift to the smaller banks not subject to the levy. Ironically, the Massachusetts retail deposit business is a clear example of such a market.
- Second, even in those product markets dominated by large banks, the bank tax was so small that, even if its burden could have been shifted completely to customers, the impact would have been, in practical terms, undetectable….

customer pricing is measured in double-digit percentage points; the change in pricing due to the tax, at the most, would have been measured in single-digit basis points. Customers, therefore, cannot be said to have benefitted meaningfully by virtue of todayʼs bank tax elimination. Indeed, the only clear winners appear to be a handful of very large capital market-facing banks, including Goldman Sachs, Morgan Stanley, Bank of New York Mellon, and State Street.

click to enlarge

That would have been the theoretical price increase in the extreme case where all of it was passed onto consumers. The left side is estimated fee in basis points. Now it goes to the deposit base. The thousands and thousands of small and medium-sized and FDIC-insured banks. And guess what? Senator Brown says he’ll ‘continue to review’ Wall St. reform over recess. Of course he will.

But this sure beats trying to meet Cantwell’s concerns about derivatives loopholes, right?